the business plan - chinnovate and share ideas about the newland medical technologies case study,...

281

Why Do a Business Plan?

The book Undaunted Courage tells the story of theextraordinary journey of the Lewis and Clark expedi-tion to explore the new Louisiana Purchase andreach the Pacific Ocean. The two leaders of this in-credibly ambitious trip invested two years to preparean extremely thorough plan. Yet day after day duringthe journey—from 1804 to 1806—they venturedinto uncharted territory, without good maps, or any-one on the original crew who knew the rivers andtrails. Thus on numerous occasions the expeditionwould lose its way for long stretches and have tobacktrack for miles. Encounters with grizzly bearswere terrifying. And without the help of NativeAmerican tribes along the way, they all would have

perished. All the planning and preparation in theworld could not have foreseen the unknowns theyfaced or prepared them with strategies and tactics todeal with each new situation.

This epic adventure has many things in commonwith most start-ups—especially for young entrepre-neurs taking such a journey for the first time, as manyof you are. It is an unmapped course; and as we dis-cussed in Chapter 3, its dynamic and chaotic proper-ties create many risks, surprises, and pitfalls, as well asrewards. Also, a first-time traveler has little or noexperience to fall back on as a guide and reality check.Finally, for a first-time entrepreneur, grizzly bears areout there—you just don’t know where, when you’llhappen upon them, or how many will try to eat you.To embark on a perilous start-up journey without

8Chapter Eight

The Business Plan“The most successful people are those who are good at Plan B.”

James Yorke (1941– )

Results ExpectedUpon completion of this chapter, you will be able to1. Utilize a model of a proven business plan—refined over nearly 40 years of actual use.2. Determine what needs to be included in the plan, why, and for whom.3. Identify some pitfalls in the business plan preparation process and understand how to

avoid them.4. Articulate what has to be done to develop and complete a business plan for your

proposed venture, and understand the level of commitment required to turn thatvision into a written document.

5. Explain how a well-articulated business plan is an important part of the entrepreneur-ial process, not an end in itself.

6. Discuss and share ideas about the Newland Medical Technologies case study, andassess the business plan developed by that young entrepreneur to raise capital for hermedical device venture.

tim81551_ch08IT.qxd 1/19/12 12:05 PM Page 281

some serious planning defies sensibility. Particularlyfor a first-timer, a plan has numerous benefits:

It is a great way for you and your current and/orprospective partners to learn about the businessand to gain critical insights into each other’sstyle, strengths and weaknesses, and how youwill work together.It will give you intimate knowledge of the “fouranchors” noted earlier, including key ingredi-ents such as the opportunity, the buyer anduser, the market and competition, the econom-ics and financial characteristics of the business,and the likely entry strategy.It is a great tool with which to communicateand to persuade stakeholders, including poten-tial backers, team members, key new hires,directors, brain trust prospects, and strategicpartners.It will prevent (or at least minimize) any temp-tation to jump ahead prematurely, as well aslimit sloppiness with regard to the hard think-ing, the necessary research, and creative prob-lem solving.It will test your commitment and prevent yourheart from getting too far ahead of your head(falling in love with your idea and losing yourobjectivity).It will save you time, help you avoid commonmistakes, and help create order out of what isfundamentally a chaotic and, in many respects,unpredictable and unplannable event—a coreparadox of the entrepreneurial process.It will help you create the best—but notperfect—road map and blueprint for you andyour team to move ahead. And it can bechanged; in fact, it is often necessary to do so,as suggested in the opening quotation by JamesYorke.It is a medium for discussion with prospectiveinvestors, and it can reveal who among them ismost knowledgeable, creative, suited for, andlikely to add significant value to your venture.

Why would you not want to acquire these benefits?

When Is a Business Plan Not Needed?

Needless to say, not all new businesses have start-upbusiness plans. Back-of-the envelope business plansthat turn into legendary businesses defy convention.As a result, some people argue that business plansare not necessary at all—and even that they get inthe way of action. Yet most of these legendary excep-tions are from either genius-type entrepreneurs

(such as Bill Gates or the Google founders) or very ex-perienced ones. Entrepreneurs who have previouslymade investors wealthy with their last ventures typi-cally can raise capital for their next ventures withoutexhaustive start-up plans. Often two or three Power-Point slides will suffice. There are opportunities thatmay simply be moving too fast, and the best tactic maybe what we call a “dehydrated business plan.” Beforeyou reach your own conclusion, consider the ideas,tips, and issues we will share in the next few pages.

Developing the Business Plan

The business plan itself is the culmination of a usuallylengthy, arduous, creative, and iterative process that,as we explored in Chapters 5 and 6, can transform thecaterpillar of a raw idea into the magnificent butterflyof an opportunity. The plan will carefully articulatethe merits, requirements, risks, and potential rewardsof the opportunity and how it will be seized. It willdemonstrate how the anchors noted here (and inChapter 5) reveal themselves to the founders andinvestors by converting all the research, carefulthought, and creative problem solving from the Ven-ture Opportunity Screening Exercises into a thor-ough plan. The business plan for a high-potentialventure reveals the business’s ability to

Create or add significant value to a customer orend user.Solve a significant problem, or meet a signifi-cant want or need for which someone will pay apremium.Have robust market, margin, and moneymakingcharacteristics: large enough ($50� million),high growth (20-plus percent), high margins(40� percent), strong and early free cash flow(recurring revenue, low assets, and workingcapital), high profit potential (10 to 15 percentafter tax), and attractive realizable returns forinvestors (25 to 30 percent IRR).Fit well with the founder(s) and managementteam at the time, in the marketplace, and withthe risk–reward balance.Scale with an eye toward sustainability andimpacts.

The plan becomes the point of departure forprospective investors to begin their due diligence toascertain potential and various risks of the venture:technology risks, market risks, management risks,competitive and strategic risks, and financial risks.Even if you do not intend to raise outside capital, thishomework is vital. The collisions between foundersand investors that occur during meetings, discussions,

282 Part II The Opportunity

tim81551_ch08IT.qxd 1/19/12 12:05 PM 82

Chapter 8 The Business Plan 283

and investigations reveal a great deal to all parties andbegin to set the mood for their relationship and nego-tiations. Getting to know each other much moreclosely is a crucial part of the evaluation process.Everyone will be thinking, Are these intelligent peo-ple? Can we work well with them during thick but es-pecially thin times? Are they creative? Do they listen?Can they add value to the venture? Is this the rightmanagement? Do I want them as business partners?Are they honest? Are we having fun yet?

The investors who can bring the most insight,know-how, and contacts to the venture, and thus addthe greatest value, will reveal themselves as well. Themost valuable investors will see weaknesses, evenflaws, in how the market is viewed, the technology orservice, the strategies, the proposed size and struc-ture of the financing, and the team—and will proposestrategies and people to correct these. If it is the rightinvestor, it can make the difference between an aver-age and a good or great venture.

The Plan Is Obsolete at the Printer

The authors have argued for three decades that theplan is obsolete the instant it emerges from the printer.In today’s fast-paced climate, it is obsolete before itgoes into the printer! The pace of technological andinformation-age change, and the dynamism of theglobal marketplace, shorten the already brief lifeexpectancy of any business plan. It is nearly impossi-ble to find a year-old venture today that is identical instrategy, market focus, products or services, and teamas the original business plan described.

Work in Progress—Bent Knees RequiredIn such a rapidly changing environment, flexibility andresponsiveness become critical survival skills. Develop-ing an idea into a business, and articulating how thiswill be done via a business plan, requires an open mindand “bent knees,” along with clear focus, commitment,and determination.

The business plan should be thought of as a work inprogress. Though it must be completed if you are tryingto raise outside capital, attract key advisors, directors,team members, or the like, it can never be finished.Like a cross-country flight plan, many unexpectedchanges can occur along the way: a thunderstorm,smoke-impaired visibility, fog, or powerful winds candevelop. You have to be prepared to continually adjustcourse to minimize risk and ensure successful comple-tion of the journey. Such risk–reward management isinherent in the business planning process.

The Plan Is Not the Business

Developing the business plan is one of the best waysto define the blueprint, strategy, resource, and peo-ple requirements for a new venture. This documentfocuses and communicates the founder’s vision. Thevast majority of INC.’s 500 fastest-growing companieshad business plans at the outset. Without a businessplan, it is exceedingly difficult to raise capital from in-formal 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-

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 forcompanies. A revolution is under way in business as forward-thinking companies gain competitive advantage byreorienting 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 brandnames and stock prices are increasingly influenced by environmental records. Growing numbers of firms workingin areas as diverse as building construction, furnishings, food, energy, transportation, and materials design—toname a few—are bringing new green designs to market. But green gestures will not be enough if the competi-tion understands a deeper dimension to the issues and builds its strategy accordingly.

Businesses now experience increased global regulatory pressure, demand for heightened transparency, andgrowing public concern about the environment and health. Government procurement and business buyersincreasingly use environmental criteria in purchasing. Markets in and taxes on carbon emissions now factor intocorporate strategy. Companies also face environmental performance pressures from the investment sector,including stockholder petitions and unprecedented growth in screened investment funds that rank corporatebehavior on environmental issues. These forces have created a much more complex and challenging businessclimate, 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.


matically be successful. They confuse the plan withbuilding the business. Some of the most impressivebusiness plans never become great businesses. Andsome of the weakest plans lead to extraordinary businesses. “I remember that when Ctrip wasfounded in 1999”, recalls Liang Jianzhang, one of the four founders of Ctrip.com International Ltd, aChina travel Web site, “I did write a business plan,but it was very short. I finished it in one night. It wasonly a little bit more than 10 pages, with a few hun-dred words per page, so that would be a few thousandwords in total.” 1

Liang and his partners approached IDG Venturesfor funding. Two partners of IDG Ventures and onetechnical expert from IDG’s Boston Headquarterwere present during the first meeting. IDG Venturesdid not spend much time asking Ctrip about theirbusiness and profit model, and during the internaldiscussion after the meeting the technical expert com-mented that “they don’t have a defined long-termgoal, and they’re not quite clear about how to carryout the combination of the Internet and travel busi-ness”. Nevertheless, the IDG Ventures invested half amillion USD in Ctrip a week later, becoming Ctrip’ssole first-round investor.

According to Zhang Suyang, one of the two partnersof IDG Ventures who met the Ctrip team, what IDGVentures values most is Ctrip’s team. The fourfounders all have different backgrounds and impres-sive career paths, so they complement one anothervery well. What’s more, they already knew one anotherby the time they started up the company, so they arenot likely to have as much friction and conflict as teamsthat partnered up provisionally will have. Of coursethey’re in a good time as well—there are some successful examples of travel Web sites in the U.S. already.2 IDG Ventures invested another few millionUSD in Ctrip during additional rounds. Eventually,the IPO of Ctrip at Nasdaq brought a 34-fold returnfor IDG Ventures.3 Today, the market value of Ctrip’slisted security is more than US$7 million.4

The message here is two-edged. The odds can beshaped in your favor through the development of abusiness plan. But just because you have a plan doesnot mean the business will be an automatic success.Unless the fundamental opportunity is there, alongwith the requisite resources and team needed to pur-sue it, the best plan in the world won’t make much dif-ference. Some helpful tips in preparing a business plan are summarized in Exhibit 8.1.


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 andwhat 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 firmand 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 limitsthe 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 thecheck clears!)

1 Chen Cheng, “Ctrip—Progressing from Traditional”, Guangzhou Daily, April 17, 2003; Time Magazine, http://www.ittime.com.cn/content.asp?id=539.2 Zhu Yingshi/Malei, “Management Team Par Excellence—Ctrip”, CITIC Press, January 1, 2008.3 Chen Li Qing, “The Elements of a Successful Venture—Management”, IDGVC, IDGVC, Carlyle and CITIC, “New Finance”, August 2006.4 Ctrip Nasdaq quotes. http://quotes.nasdaq.com/asp/SummaryQuote.asp?symbol=CTRP&selected=CTRP; “Ctrip Priced Its IPO of 4.2 million ADSs on Nasdaq,”

Ctrip.com/Investors Relations/News; http://ir.ctrip.com/phoenix.zhtml?c=148903&p=irol-newsArticle&ID=879032&highlight=.



Some Tips from the Trenches

The most valuable lessons about preparing a businessplan and raising venture capital come from entrepre-neurs who have succeeded in these endeavors. NeilShen, founder-member, previously CFO, and previ-ously CEO of Ctrip.com International Ltd. and nowa Chinese partner at Sequoia Capital, is difficult todescribe in one word. He is a special hybrid of entre-preneur and investor.

Shen has the following advice to share with bud-ding entrepreneurs:

Do what you enjoy instead of copying success-ful ventures already in the market.Prepare carefully to meet challenges in manag-ing the team and the business.Focus your resources on a single idea and thengradually expand on it.

In a talk he gave to Cheung Kong MBA studentson July 3, 2007, he said, “A product that is successfulin Shanghai will highly likely be easily adopted by theBeijing market. More of it rests on the team. For us,we place a heavy emphasis on grooming the middlemanagement as well as implementing regular systemchecks. This helps us to manage the risks associatedwith consumer products in the Shanghai and Beijingmarkets.”

On the makeup of his team, Shen says that suc-cess certainly centers on complementing each oth-ers’ strengths and weaknesses. “For example, the IT,marketing, financial, and consulting departmentsplay their respective roles well,” he says. “It helps tohave the same mentality, vision, and attitude in man-aging the business and offering our clients the bestservice. I feel that we have done well in these two ar-eas. After collaborating for so many years, we arenow pursuing different interests and the next stageof our career, but we have still maintained our verygood ties.”

How to Determine If Investors Can Add Value

One of the most frequently missed opportunities in the entire process of developing a business planand trying to convince outside investors to part with their cash is a consequence of sell-sell-sell! myopia by the founders. Selling ability is one of the most common denominators among successfulentrepreneurs.

Too often, however, entrepreneurs—typically outof cash, or nearly so—become so obsessed with sell-ing to prospective investors that they fail to ask greatquestions and do little serious listening. As a result,these founders learn little from these prospects, even

though they probably know a great deal about thetechnology, market, and competitors. After all, that isthe investor’s business.

Entrepreneurs who not only succeed at develop-ing a great business concept but also attract the rightinvestors who can add a great deal of value to the ven-ture through their experience, wisdom, and networksare usually very savvy listeners. They use the oppor-tunity, beyond presenting their plan and sellingthemselves, to carefully query prospective investors:You’ve seen our concept, our story, and our strate-gies; what have we missed? Where are we vulnera-ble? How would you knock us off? Who will knock usoff? How would you modify our strategy? Whatwould you do differently? Whom do we need with usto make this succeed? What do you believe has tohappen to make this highly successful? Be as blunt asyou wish.

Two powerful forces are unleashed in this process.First, as a founder, you will begin to discern just howsmart, knowledgeable, and, most important, creativethe investors are about the proposed business. Dothey have creative ideas, insights, and alternativeways of thinking about the opportunity and strategythat you and your team may not have thought of?This enables you, the founder, to ascertain just whatvalue the investors might add to the venture andwhether their approach to telling you and your teamthat you are “all wet” on certain things is acceptable.Would the relationship be likely to wear you out overtime and demoralize you? In the process you willlearn a great deal about your plan and the investors.

The second powerful force is the message implic-itly sent to the investors when you make such genuinequeries and listen, rather than become argumenta-tive and defensive (which they may try to get you todo): We have given this our best shot. We are highlycommitted to our concept and believe we have theright strategy, but our minds are open. We listen; welearn; we have bent knees; we adapt and changewhen the evidence and ideas are compelling; we arenot granite heads. Investors are much more likely toconclude that you are a founder and a team that theycan work with.

The Dehydrated Business Plan

A dehydrated business plan usually runs from 4 to 10 pages, but rarely more. It covers key points,such as those suggested for the executive summaryin the business planning guide that follows. Essen-tially, such a plan documents the analysis of and in-formation about the heart of the business opportu-nity, competitive advantages the company willenjoy, and creative insights that an entrepreneur of-ten has.


Because it can usually be prepared in a fewhours, it is preferred by entrepreneurs who find itdifficult to find enough slack time while operating abusiness to write a complete plan. In many in-stances, investors prefer a dehydrated plan in theinitial screening phase.

A dehydrated plan is not intended to be used ex-clusively in the process of raising or borrowingmoney; it can be a valuable compass to keep you ontrack. Consider it a map of the main battlegroundahead, but remember that it will not provide thenecessary details and tactical plans necessary to con-duct 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 andstart the business.

There are two good reasons it is not a good ideato hire outside professionals. First, in the process ofplanning and of writing the business plan, the con-sequences of different strategies and tactics and the human and financial requirements for launch-ing and building the venture can be examined before it is too late. For example, one entrepreneurdiscovered, while preparing his business plan, that the major market for his biomedical product was in nursing homes rather than in hospital emer-gency rooms, as he and his physician partner hadpreviously assumed. This realization changed thefocus of the marketing effort. Had he left thepreparation to an outsider, this might not have been discovered or, at the very least, it is unlikelyhe would have had the same sense of confidenceand commitment to the new strategy. The bottomline is, write the business plan with your own teammembers, as you are the ones who know the busi-ness; your antennas can sense opportunities andthreats better than any outsider. On the other hand,if an outsider can detect risks and opportunitiesbetter than you can, then you are likely to face stiffcompetition.

A Closer Look at the What

The Relationship between Goals and Actions

Consider a team that is enthusiastic about an idea for anew business and has done a considerable amount ofthinking and initial work evaluating the opportunity(such as thoroughly working through the Venture

Opportunity Screening Exercises in Chapter 6).Team members believe the business they are con-sidering has excellent market prospects and fits wellwith the skills, experience, personal goals, values,and aspirations of the lead entrepreneur and themanagement team. They now need to ask about themost significant risks and problems involved inlaunching the enterprise, the long-term profitprospects, and the future financing and cash flowrequirements. The team must determine the de-mands of operating lead times, seasonality, facilitylocation, marketing and pricing strategy needs, andso forth, so they can take action.

These questions now need to be answered con-vincingly with the evidence for them shown in writing. The planning and the development of sucha business plan is neither quick nor easy. In fact, ef-fective planning is a difficult process that demandstime, discipline, commitment, dedication, and prac-tice. However, it also can be stimulating and fun asinnovative solutions and strategies to solve naggingproblems are found.

The skills to write a business plan are not neces-sarily the ones needed to make a venture successful (although some of these skills are certainly useful).Nick Yang, the founder of Kongzhong (a pioneer inthe cellular phone business in China and a NAS-DAQ-listed company) found that the single point ofdeparture for, and an anchor during, the planningprocess is the slogan “Above the Best.” He says,“Whether the market is good or not good, competi-tion is always there. Every trade has competition.You’ve got to understand your competitors very well in order to compete. But when you have donethat and actually lead the pack in competition, whatdo you do? You need to make sure that you stay there, because people try to go above you. Our motto is ‘Above the Best.’ Are we the best today? Ifwe are the best today, we must be above the best tomorrow.”

Further, if a venture intends to use the businessplan to raise capital, it is important for the team todo the planning and write the plan itself. Investorsattach great importance to the quality of the man-agement team and to their complete understanding of the business they are preparing to enter. Thus investors want to be sure that what they see is whatthey get—that is, the team’s analysis and under-standing of the venture opportunity and its commit-ment to it. Investors usually correlate a team’s abil-ity to communicate the vision with their ability tomake it a reality. They are going to invest in a teamand a leader, not in a consultant. Nothing less willdo, and anything less is usually obvious.




Segmenting and IntegratingInformation

When planning and writing a business plan, it isnecessary to organize information in a way that itcan be managed and that is useful.

An effective way to organize information with theidea of developing a business plan is to segment theinformation into sections, such as the target market,the industry, the competition, the financial plan,and so on, and then integrate the information into abusiness plan.

This process works best if sections are discreteand the information within them digestible. Thenthe order in which sections are developed can vary,and different sections can be developed simultane-ously. For example, because the heart and soul of aplan lie in the analysis of the market opportunity, ofthe competition, and of a resultant competitivestrategy that can win, it is a good idea to start withthese sections and integrate information along theway. Because the financial and operations aspects of the venture will be driven by the rate of growthand the magnitude and the specific substance of the market revenue plans, these can be devel-oped later.

The information is then further integrated intothe business plan. The executive summary is pre-pared last.

Establishing Action Steps

The following steps, centered around actions to betaken, outline the process by which a business planis written. These action steps are presented in theBusiness Plan Guide exercise at the end of thischapter.

Segmenting information. An overall plan forthe project, by section, needs to be devisedand needs to include priorities—who is re-sponsible for each section, the due date of afirst draft, and the due date of a final draft.Creating an overall schedule. Next create amore specific list of tasks; identify prioritiesand who is responsible for them. Determinewhen they will be started and when they willbe completed. This list needs to be as specificand detailed as possible. Tasks need to be bro-ken down into the smallest possible compo-nents (e.g., a series of phone calls may benecessary before a trip). The list then needs tobe examined for conflicts and lack of reality intime estimates. Peers and business associatescan be asked to review the list for realism, tim-ing, and priorities.

Creating an action calendar. Tasks on the dolist then need to be placed on a calendar.When the calendar is complete, the calendarneeds to be reexamined for conflicts or lack ofrealism.Doing the work and writing the plan. The necessary work needs to be done and the plan written. Adjustments need to be made tothe do list and the calendar, as necessary. Aspart of this process, it is important to have aplan reviewed by an attorney to make sure itcontains no misleading statements, unneces-sary information, and caveats. The plan alsoneeds to be reviewed by an objective outsider, such as an entrepreneurially mindedexecutive who has significant profit and lossresponsibility, or a venture capitalist whowould not be a potential investor. No matterhow good the lead entrepreneur and his or herteam are in planning, there will be issues thatthey will overlook and certain aspects of thepresentation that are inadequate or less thanclear. A good reviewer also can act as a sounding board in the process of developingalternative 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 completedthe exercises in Chapter 6 and who has spent hoursinformally thinking and planning that jotting down afew things is all that needs to be done. However, thereis a great difference between screening an opportu-nity and developing a business plan.

There are two important differences in the waythese issues need to be addressed. First, a businessplan can have two uses: (1) inducing someone to partwith $500,000 to $10 million or more, and (2) guidingthe policies and actions of the firm over a number ofyears. Therefore, strategies and statements need tobe well thought out, unambiguous, and capable ofbeing supported.

Another difference is that more detail is needed.(The exception to this is the dehydrated business plandiscussed earlier in this chapter.) This means the teamneeds to spend more time gathering detailed data, in-terpreting them, and presenting them clearly. For ex-ample, for the purpose of screening an opportunity, itmay 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 over10 percent per year. For planning an actual launch,this level of detail is not sufficient. The size rangewould need to be narrowed considerably; if it werenot narrowed, those reading or using the plan wouldhave little confidence in this critical number. And say-ing the target market is growing at over 10 percent istoo vague. Does that mean the market grew at thestated rate between last year and the year before, ordoes it mean that the market grew on average bythis amount over the past three years? Also, a state-ment phrased in terms of “over 10 percent” smacksof imprecision. The actual growth rate needs to be

known and stated. Whether the rate will or will notremain the same, and why, must also be explained.

Preparing an effective business plan for a start-upcan easily take 200 to 300 hours. Squeezing thatamount of time into evenings and weekends canmake the process stretch over 3 to 12 months.

A plan for a business expansion or for a situationsuch as a leveraged buyout typically takes half thiseffort because more is known about the business,including the market, its competition, financial andaccounting information, and so on.

Exhibit 8.2 is a sample table of contents for a busi-ness plan. The information shown is included in most


EXHIBIT 8.2

Business Plan Table of Contents

I. EXECUTIVE SUMMARYDescription 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 ANALYSISCustomers.Market Size and Trends.Competition and Competitive Edges.Estimated Market Share and Sales.Ongoing Market Evaluation.

IV. THE ECONOMICS OF THE BUSINESSGross and Operating Margins.Profit Potential and Durability.Fixed, Variable, and Semivariable Costs.Months to Breakeven.Months to Reach Positive Cash Flow.

V. MARKETING PLANOverall Marketing Strategy.Pricing.Sales Tactics.Service and Warranty Policies.Advertising and Promotion.Distribution.

VI. DESIGN AND DEVELOPMENT PLANSDevelopment Status and Tasks.Difficulties and Risks.Product Improvement and New Products.Costs.Proprietary Issues.

VII. MANUFACTURING AND OPERATIONS PLANOperating Cycle.Geographical Location.Facilities and Improvements.Strategy and Plans.Regulatory and Legal Issues.

VIII. MANAGEMENT TEAMOrganization.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 IMPACTIssues of Sustainability of the Venture.Impact on the Environment.Impact on the Community and Nation.

X. OVERALL SCHEDULEXI. CRITICAL RISKS, PROBLEMS, AND ASSUMPTIONSXII. 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 OFFERINGDesired Financing.Offering.Capitalization.Use of Funds.Investor’s Return.

XIV. APPENDIXES



effective business plans and is a good framework tofollow. Organizing the material into sections makesdealing with the information more manageable.Also, while the amount of detail and the order ofpresentation may vary for a particular venture ac-cording to its circumstances, most effective business

plans contain this information in some form. (Theamount of detail and the order in which informationis presented is important. These can vary for eachparticular situation and will depend on the purposeof the plan and the age and stage of the venture,among other factors.)

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 (oridentify 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 relatedirectly to the nuts and bolts of your business plan. Interesting information should be relegated to the appendix so itdoesn’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 muchthey 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 forsharing this with us. They use this approach in their work with the Denali Initiative, a national program that teaches entrepreneurship to leaders ofnonprofit organizations from many parts of the country, and use New Venture Creation in its curriculum.

Chapter Summary

The business plan is more of a process and work inprogress than an end in itself.Given today’s pace of change in all areas affecting anenterprise, the plan is obsolete the moment it emergesfrom the printer.The business plan is a blueprint and flight plan for a journey that converts ideas into opportunities, articulates and manages risks and rewards, and articu-lates the likely flight and timing for a venture.The numbers in a business plan don’t matter, but theeconomics of the business model and value proposi-tion matter enormously.

The plan is not the business; some of the most suc-cessful ventures were launched without a formalbusiness plan or with one that would be consideredweak or flawed.Preparing and presenting the plan to prospectiveinvestors is one of the best ways for the team to have a trial marriage, to learn about the venture strat-egy, and to determine who can add the greatestvalue.The dehydrated business plan can be a valuableshortcut in the process of creating, shaping, andmolding an idea into a business.



Study Questions

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

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 plandon’t matter.

7. How can entrepreneurs use the business plan processto identify the best team members, directors, andvalue-added investors?

8. Prepare an outline of a business plan tailored to thespecific 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/oBusiness Resource Software.

MIND STRETCHERS

Have You Considered?

1. You have sell-sell-sell mind-set myopia, but it has tobe 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 toyour advantage to prepare a business plan?

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

4. Some of the most valuable critiques and inputs onyour venture will come from outside your team. Whoelse 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 potentialcompetitor of the venture proposed in the plan. Whatwould you do?



An Exercise and Framework

This Business Plan Guide follows the order of presentationoutlined in Exhibit 8.2 It is based on the following: on aguide originally developed by Venture Founders Corpora-tion by Leonard E. Smollen and the late Brian Haslett; ontwo books (Way of the VC—Top Venture Capitalists onYour Board and Chinnovation—How Chinese InnovatorsAre Changing the World) originally developed by TanYinglan; and on more than 30 years of observing andworking with entrepreneurs and actually preparing andevaluating hundreds of plans. It is intended to make thischallenging 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 situa-tion. While there are many ways to approach the prepa-ration for and writing of a business plan, it is recom-mended that you begin with the market research andanalysis sections. In writing your plan, you should remem-ber that although one of the important functions of a busi-ness plan is to influence investors, rather than preparing afancy presentation, you and your team need to prove toyourselves and others that your opportunity is worth pursu-ing and to construct the means by which you will do it.Gathering information, making hard decisions, and devel-oping 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 isand that information not clearly presented will most likelynot be used, it also is important not to be concerned justwith format. The Business Plan Guide indicates specific is-

sues and shows you what needs to be included in a busi-ness plan and why.

You may feel as though you have seen much of this be-fore. You should. The guide is based on the analyticalframework described in the book and builds upon the Ven-ture Opportunity Screening Exercises in Chapter 6. If youhave not completed the Opportunity Screening Exercises, itis helpful to do so before proceeding. The Business PlanGuide will allow you to draw on data and analysis devel-oped in the Venture Opportunity Screening Exercises asyou prepare your business plan.

As you proceed through the Business Plan Guide, re-member that statements need to be supported with datawhenever possible. Note also that it is sometimes easier topresent data in graphic, visual form. Include the source ofall data, the methods and/or assumptions used, and thecredentials of people doing research. If data on which astatement is based are available elsewhere in the plan, besure to reference where.

Remember that the Business Plan Guide is just that—aguide. It is intended to be applicable to a wide range ofproduct and service businesses. Certain critical issues areunique to any industry or market. In the chemical industry,for example, some special issues of significance currentlyexist, such as increasingly strict regulations at all levels ofgovernment concerning the use of chemical products andthe operation of processes, diminishing viability of the highcapital cost, special-purpose chemical processing plantsserving a narrow market, and long delivery times of pro-cessing equipment. In the electronics industry, the specialissues may be the future availability and price of new kindsof large-scale integrated circuits. Common sense shouldrule in applying the guide to your specific venture.

Exercise 1The Business Plan Guide



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. Whenyou segment your information, it is vital to keep in mind that the plan needs to be logically integrated and that informationshould be consistent. Because the market opportunity section is the heart and soul of the plan, it may be the most difficult sec-tion to write; but it is best to assign it a high priority and to begin working there first. Remember to include such tasks as print-ing in the list.

Date Completed Section Person(s) Date to First Draft or Final Version or Task Priority Responsible Begin Due Date Due Date



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 tasknecessary 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



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 isto 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 cal-endar, 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



STEP 4A Framework to Develop and Write a BusinessPlan.As has been discussed, the framework here follows theorder of presentation of the table of contents shown inExhibit 8.2. While preparing your own plan, you will mostlikely want to consider sections in a different order from theone presented in this exhibit. (Also, when you integrateyour 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 of-fered. Usually the name, address, telephone number, andthe date are centered at the top of the page and the securi-ties offered are listed at the bottom. Also suggested on thecover page at the bottom is the following text:

This business plan has been submitted on a confidentialbasis solely for the benefit of selected, highly qualifiedinvestors in connection with the private placement of theabove securities and is not for use by any other persons.Neither may it be reproduced, stored, or copied in anyform. By accepting delivery of this plan, the recipientagrees to return this copy to the corporation at the addresslisted above if the recipient does not undertake to subscribeto the offering. Do not copy, fax, reproduce, or distributewithout permission.

Table of Contents

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

I. Executive Summary The first section in thebody of the business plan is usually an executive summary.The summary is usually short and concise (one or twopages). 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 thefirm will gain entry and market penetration—it answers thequestions we asked in Chapter 5: “For what reason doesthis venture exist and for whom?”

Essentially the summary for your venture needs to mirrorthe criteria shown in Exhibit 5.8 and the Venture Opportu-nity Screening Exercises in Chapter 6. This is your chance toclearly 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 sectionsof the business plan are completed. As the other sectionsare drafted, it is helpful to note one or two key sentencesand some key facts and numbers from each.

The summary is important for those ventures trying toraise or borrow money. Many investors, bankers, man-agers, and other readers use the summary to determinequickly whether they find the venture of interest. Therefore,unless the summary is appealing and compelling, it may be

the only section read, and you may never get the chance tomake 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 ofpreparation for each minute of their speech.)

The executive summary usually contains a paragraph ortwo covering each of the following:

A. Description of the business concept and the business.Describe the business concept for the business you areor will be in. Be sure the description of your conceptexplains how your product or service will fundamen-tally change the way customers currently do certainthings. For example, Arthur Rock, the lead investor inApple Computer and Intel, has stated that he focuseson concepts that will change the way people liveand/or work. You need to identify when the companywas formed, what it will do, what is special or propri-etary about its product, service, or technology, and soforth. Include summary information about any propri-etary technology, trade secrets, or unique capabilitiesthat give you an edge in the marketplace. If the com-pany has existed for a few years, a brief summary ofits size and progress is in order. Try to make yourdescription use 25 or fewer words, and brieflydescribe the specific product or service.

B. The opportunity and strategy. Summarize what the op-portunity is, why it is compelling, and the entry strat-egy planned to exploit it. Clearly state the main pointor benefit you are addressing. This information maybe presented as an outline of the key facts, condi-tions, competitors’ vulnerabilities (“sleepiness,” slug-gishness, poor service, etc.), industry trends (is itfragmented or emerging?), and other evidence andlogic that define the opportunity. Note plans forgrowth and expansion beyond the entry products orservices and into other market segments (such as inter-national markets) as appropriate.

C. The target market and projections. Identify and brieflyexplain the industry and market, who the primary cus-tomer groups are, how the product(s) or service(s) willbe positioned, and how you plan to reach and serv-ice these groups. Include information about the struc-ture of the market, the size and growth rate for themarket segments or niches you are seeking, your unitand dollar sales estimates, your anticipated marketshare, the payback period for your customers, andyour pricing strategy (including price versus perfor-mance/value/ benefits considerations).

D. The competitive advantages. Indicate the significantcompetitive edges you enjoy or can create as a resultof your innovative product, service, and strategy; ad-vantages in lead time or barriers to entry; competitors’weaknesses and vulnerabilities; and other industryconditions.

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


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

F. The offering. Briefly indicate the dollar amount ofequity and/or debt financing needed, how much of thecompany you are prepared to offer for that financing,what principal use will be made of the capital, andhow the investor, lender, or strategic partner willachieve its desired rate of return. Remember, your tar-geted resource provider has a well-defined appetite,and you must understand the “Circle of Venture Capi-tal Ecstasy” (Exhibit 5.1).

II. The Industry and the Company and ItsProduct(s) or Service(s) A major area of consider-ation is the company, its concept for its product(s) and ser-vice(s), and its interface with the industry in which it will becompeting. This is the context into which the marketing infor-mation, for example, fits. Information needs to include adescription of the industry, a description of the concept, adescription of your company, and a description of the prod-uct(s) or service(s) you will offer, the proprietary position ofthese product(s) or service(s), their potential advantages, andentry 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, andcompetitors.

Discuss any new products or developments, newmarkets and customers, new requirements, new en-trants and exits, and any other national or eco-nomic trends and factors that could affect theventure’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 thatmay 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 toenter, what product(s) or service(s) it will offer, andwho are or will be its principal customers.

By way of background, give the date your venturewas incorporated and describe the identificationand development of its products and the involvementof the company’s principals in that development.

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

current and future efforts to prevent a recurrence ofthese difficulties and to improve your company’sperformance.

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

Describe in some detail each product or service tobe sold.

Discuss the application of the product or serviceand describe the primary end use as well as anysignificant secondary applications. Articulate howyou will solve a problem, relieve pain, or provide abenefit or needed service.

Describe the service or product delivery system.

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

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 willbe required to fully develop, test, and introduce theproduct 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 wouldenable you to achieve a favored or entrenchedposition in the industry.

Describe any features of the product or service thatgive 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 theproduct line or the development of related productsor services. (Emphasize opportunities and explainhow you will take advantage of them.)

D. Entry and growth strategy.

Indicate key success variables in your marketingplan (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 towhat size during the first five years and your plansfor growth beyond your initial product or service.

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




competitive advantages, such as the weakness ofcompetitors.Discuss the overall environmental and social sus-tainability of your growth plan. Consider the effecton the community if the growth strategy involvesoffshore manufacturing or outsourced labor.

III. Market Research and Analysis Informa-tion in this section needs to support the assertion that theventure can capture a substantial market in a growingindustry and stand up to competition. Because of the impor-tance of market analysis and the critical dependence ofother parts of the plan on this information, you are advisedto prepare this section of the business plan before anyother. Take enough time to do this section very well and tocheck 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 sec-tions of the business plan depend on the market researchand analysis presented here. For example, the predictedsales levels directly influence such factors as the size of themanufacturing operation, the marketing plan, and theamount of debt and equity capital you will require. Most en-trepreneurs seem to have great difficulty preparing and pre-senting market research and analyses that show that theirventures’ sales estimates are sound and attainable.

A. Customers.Discuss who the customers for the product(s) orservice(s) are or will be. Note that potential cus-tomers need to be classified by relatively homoge-neous groups having common, identifiablecharacteristics (e.g., by major market segment). Forexample, an automotive part might be sold to man-ufacturers and to parts distributors supplying the re-placement market, so the discussion needs toreflect two market segments.Show who and where the major purchasers for theproduct(s) or service(s) are in each market segment.Include national regions and foreign countries, asappropriate.Indicate whether customers are easily reached andreceptive, how customers buy (wholesale, throughmanufacturers’ representatives, etc.), where in theirorganizations buying decisions are made, and howlong decisions take. Describe customers’ purchasingprocesses, including the bases on which they makepurchase decisions (e.g., price, quality, timing, deliv-ery, training, service, personal contacts, or politicalpressures) and why they might change current pur-chasing decisions.List any orders, contracts, or letters of commitmentthat you have in hand. These are the most powerfuldata you can provide. List also any potential cus-tomers who have expressed an interest in the prod-uct(s) or service(s) and indicate why. Also list anypotential customers who have shown no interest inthe proposed product or service, and explain whythey are not interested and explain what you willdo to overcome negative customer reaction. Indicate

how fast you believe your product or service willbe accepted in the market.

If you have an existing business, list your principalcurrent 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 orservice you will offer, in units, dollars, and potentialprofitability.

Describe also the potential annual growth for atleast three years of the total market for your prod-uct(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 themarket. 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 andweaknesses of competitors. Assess the substituteand/or alternative products and services and list thecompanies that supply them, both domestic and for-eign, as appropriate.

Compare competing and substitute products orservices on the basis of market share, quality,price, performance, delivery, timing, service, war-ranties, and other pertinent features.

Compare the fundamental value that is added orcreated by your product or service, in terms ofeconomic benefits to the customer and to yourcompetitors.

Discuss the current advantages and disadvantagesof these products and services and say why theyare not meeting customer needs.

Indicate any knowledge of competitors’ actions thatcould lead you to new or improved products andan advantageous position. For example, discusswhether 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 eachcompetitor’s market share, sales, distribution meth-ods, and production capabilities.

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


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

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

From what you know about the competitors’ opera-tions, explain why you think they are vulnerableand 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 serv-ice(s) that will make it salable in the face of currentand potential competition. Mention, especially, thefundamental value added or created by the prod-uct(s) or service(s).

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

Based on your assessment of the advantages ofyour product or service, the market size andtrends, customers, competition and their products,and the trends of sales in prior years, estimate theshare of the market and the sales in units and dol-lars that you will acquire in each of the next threeyears. Remember to show assumptions used.

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

If yours is an existing business, also indicate the totalmarket, your market share, and sales for two prioryears.

E. Ongoing market evaluation.

Explain how you will continue to evaluate yourtarget markets; assess customer needs and service;guide product improvement, pricing, and newproduct 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 apparentmagnitude and durability of margins and profits gener-ated, need to support the fundamental attractiveness of theopportunity. The underlying operating and cash conversion

cycle of the business, the value chain, and so forth need tomake sense in terms of the opportunity and strategiesplanned.

A. Gross and operating margins.

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

B. Profit potential and durability.

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

Address the issue of how perishable or durable theprofit stream appears to be. Provide reasons whyyour profit stream is perishable or durable, such asbarriers to entry you can create, your technologicaland market lead time, and environmental sustain-ability, which in some cases can be a driver forcost reduction.

C. Fixed, variable, and semivariable costs.

Provide a detailed summary of fixed, variable, andsemivariable costs, in dollars and as percentagesof total cost as appropriate, for the product or ser-vice you offer and the volume of purchases andsales 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 toreach a unit break-even sales level.

Note any significant stepwise changes in yourbreakeven that will occur as you grow and addsubstantial capacity.

E. Months to reach positive cash flow.

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

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

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

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




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

A. Overall marketing strategy.

Describe the specific marketing philosophy andstrategy of the company, given the value chain andchannels of distribution in the market niche(s) youare pursuing. Include, for example, a discussion ofthe kinds of customer groups that you already haveorders from or that will be targeted for initial inten-sive selling effort and those targeted for later sell-ing efforts; how specific potential customers inthese groups will be identified and how they willbe contacted; what features of the product or ser-vice, such as service, quality, price, delivery, war-ranty, or training, will be emphasized to generatesales; 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, indicateany plans for extending sales later.

Discuss any seasonal trends that underlie the cashconversion cycle in the industry and what can bedone to promote sales out of season.

Describe any plans to obtain government contractsas a means of supporting product developmentcosts and overhead.

B. Pricing.

Discuss pricing strategy, including the prices to becharged for your product and service, and com-pare your pricing policy with those of your majorcompetitors, including a brief discussion of pay-back (in months) to the customer.

Discuss the gross profit margin between manufactur-ing and ultimate sales costs, and indicate whetherthis margin is large enough to allow for distributionand sales, warranty, training, service, amortizationof 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 ofcompetition, 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 economicpayback to the customer and value added throughnewness, quality, warranty, timing, performance,service, cost savings, efficiency, and the like.

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

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 discussionof the relationship of price, market share, andprofits.

C. Sales tactics.

Describe the methods (e.g., own sales force, salesrepresentatives, ready-made manufacturers’ salesorganizations, direct mail, or distributors) that willbe used to make sales and distribute the product orservice and both the initial plans and longer-rangeplans for a sales force. Include a discussion of anyspecial requirements (e.g., refrigeration).

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

Describe how distributors or sales representatives,if they are used, will be selected, when they willstart to represent you, the areas they will cover andthe head count of dealers and representatives bymonth, and the expected sales to be made byeach.

If a direct sales force is to be used, indicate how itwill be structured and at what rate (a head count) itwill be built up; indicate if it is to replace a dealeror representative organization and, if so, whenand 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 (per1,000), expected response rates, and so on. Dis-cuss how these will be built up.

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

Present a selling schedule and a sales budget thatincludes 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 theimportance of these to the customers’ purchasingdecisions and discuss your method of handlingservice problems.

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


Indicate the proposed charge for service calls andwhether service will be a profitable or break-evenoperation.

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

E. Advertising and promotion.

Describe the approaches the company will use tobring its product or service to the attention ofprospective purchasers.

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

For consumer products, indicate what kind of ad-vertising and promotional campaign will introducethe product, including sales aids to dealers, tradeshows, 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 beincurred.

F. Distribution.

Describe the methods and channels of distributionyou 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 tobe resolved or present potential vulnerabilities.

If international sales are involved, note how thesesales 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 andthe time and money required before a product or service ismarketable 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 nec-essary to convert a laboratory prototype to a finishedproduct; 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 serv-ice and explain what remains to be done to makeit marketable.

Describe briefly the competence or expertise thatyour company has or will require to complete thisdevelopment.

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

B. Difficulties and risks.

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

Discuss the possible effect on the cost of designand 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 ini-tial products, discuss any ongoing design and de-velopment work that is planned to keep theproduct(s) or service(s) that can be sold to the samegroup of customers. Discuss customers who haveparticipated 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 developmentbudget, 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 a15 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 thatgive you exclusivity or proprietary rights.

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

VII. Manufacturing and Operations PlanThe manufacturing and operations plan needs to includesuch factors as plant location, the type of facilities needed,space requirements, capital equipment requirements, andlabor force (both full- and part-time) requirements. For amanufacturing business, the manufacturing and operationsplan needs to include policies on inventory control, pur-chasing, production control, and which parts of the productwill be purchased and which operations will be performedby your workforce (called make-or-buy decisions). A service




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

A. Operating cycle.

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

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

B. Geographical location.

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

Discuss any advantages or disadvantages of thesite location in terms of labor (including labor avail-ability, whether workers are unionized, wagerates, and outsourcing), closeness to customersand/or suppliers, access to transportation, stateand local taxes and laws (including zoning and en-vironmental 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 landareas, special tooling, machinery, and other capi-tal equipment currently used to conduct the com-pany’s business, and discuss whether thesefacilities are adequate and in compliance withhealth, 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 beleased or acquired (new or used) and indicate thecosts and timing of such actions and how much ofthe proposed financing will be devoted to plantand equipment.

Explain future equipment needs in the next threeyears.

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

D. Strategy and plans.

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

Justify your proposed make-or-buy policy in termsof inventory financing, available labor skills, andother 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 ofoperation with breakdowns of applicable material,labor, purchased components, and factory over-head.

Describe your approach to quality control, produc-tion control, and inventory control; explain whatquality 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, healthpermits, and environmental approvals necessary tobegin operation.

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

Discuss any legal or contractual obligations thatare pertinent as well.

VIII. Management Team This section of the busi-ness plan includes a description of the functions that willneed to be filled, a description of the key management per-sonnel and their primary duties, an outline of the organiza-tional structure for the venture, a description of the board ofdirectors, a description of the ownership position of anyother 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 existenceof 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 companyand the individuals who will fill each position. (Ifthe 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 afull-time person without adding excessive overhead,indicate how these functions will be performed(e.g., using part-time specialists or consultants to


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

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

Discuss any current or past situations where keymanagement people have worked together thatcould indicate how their skills complement eachother and result in an effective managementteam.

B. Key management personnel.

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

Describe the exact duties and responsibilities ofeach 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 andneed to stress relevant training, experience, andconcrete accomplishments, such as profit and salesimprovement, labor management success, manu-facturing or technical achievements, and meetingbudgets and schedules.

C. Management compensation and ownership.

State the salary to be paid, the stock ownershipplanned, and the amount of equity investment (ifany) of each key member of the managementteam.

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

D. Other investors.

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

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

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

Indicate any restrictions on stock and investing thataffect ownership and disposition of stock.

Describe any performance-dependent stock optionor bonus plans.

Summarize any incentive stock option or otherstock ownership plans planned or in effect for keypeople and employees.

F. Board of directors.

Discuss the company’s philosophy about the sizeand composition of the board.

Identify any proposed board members and includea one- or two-sentence statement of each member’sbackground that shows what he or she can bringto the company.

G. Other shareholders, rights, and restrictions.

Indicate any other shareholders in your companyand any rights, restrictions, or obligations, such asnotes or guarantees, associated with these. (If theyhave all been accounted for previously, simply notethat there are no others.)

H. Supporting professional advisors and services.

Indicate the supporting services that will berequired.

Indicate the names and affiliations of the legal, ac-counting, advertising, consulting, and banking ad-visors selected for your venture and the serviceseach will provide.

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

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

Discuss the nature of any opportunities for greenimpact, such as carbon reduction, recycling, andany green technologies or production capabilitiesthat could enhance sustainability.

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

Describe any sustainability advantages you haveor can develop, and how these might relate tobuilding customer loyalty and community supportfor your product(s) or service(s).

Summarize the employment opportunities that yourbusiness is likely to create, and describe any plansfor outsourcing or using offshore labor and how thatmight impact the community and your labor pool.

Examine the potential environmental impact of yourbusiness as it grows.

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




for the schedule. In addition to being a planning aid, byshowing 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 toplan for venture growth in a way that recognizes obstaclesand minimizes investor risk. Because the time to do thingstends to be underestimated in most business plans, it is im-portant to demonstrate that you have correctly estimatedthese amounts in determining the schedule. Create yourschedule as follows:

1. Lay out (use a bar chart) the cash conversion cycle ofthe 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 andcollection.

2. Prepare a month-by-month schedule that shows thetiming of product development, market planning,sales programs, production, and operations, and thatincludes sufficient detail to show the timing of the pri-mary tasks required to accomplish an activity.

3. Show on the schedule the deadlines or milestonescritical 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 numberof management personnel, the number of productionand operations personnel, and plant or equipmentand their relation to the development of the business.

5. Discuss in a general way the activities most likely tocause a schedule slippage, what steps will be takento correct such slippages, and the impact of scheduleslippages on the venture’s operation, especially itspotential 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 im-plicit assumptions about them. You need to include adescription of the risks and the consequences of adverseoutcomes relating to your industry, your company and itspersonnel, your product’s market appeal, and the timingand financing of your startup. Be sure to discuss assump-tions concerning sales projections, customer orders, and soforth. If the venture has anything that could be considereda fatal flaw, discuss why it is not. The discovery of any un-stated negative factors by potential investors can under-mine the credibility of the venture and endanger its financ-

ing. Be aware that most investors will read the section de-scribing the management team first and then this section.

Do not omit this section. If you do, the reader will mostlikely come to one or more of the following conclusions:

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

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 venturedemonstrate your skills as a manager and increase thecredibility of you and your venture with a venture capital in-vestor or a private investor. Taking the initiative on the iden-tification and discussion of risks helps you to demonstrateto the investor that you have thought about them and canhandle them. Risks then tend not to loom as large blackclouds 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 theprocurement of parts or raw materials.Difficulties encountered in obtaining needed bankcredit.Larger-than-expected innovation and developmentcosts.Running out of cash after orders pour in.

3. Indicate what assumptions or potential problems andrisks are most critical to the success of the venture,and describe your plans for minimizing the impact ofunfavorable developments in each case.

XII. The Financial Plan The financial plan is basicto the evaluation of an investment opportunity and needs torepresent your best estimates of financial requirements. Thepurpose of the financial plan is to indicate the venture’s po-tential and to present a timetable for financial viability. Italso can serve as an operating plan for financial manage-ment using financial benchmarks. In preparing the financialplan, you need to look creatively at your venture and con-sider alternative ways of launching or financing it.

As part of the financial plan, financial exhibits need tobe prepared. To estimate cash flow needs, use cash-based,rather than accrual-based, accounting (i.e., use a real-timecash flow analysis of expected receipts and disburse-ments). This analysis needs to cover three years, includingcurrent- and prior-year income statements and balancesheets, if applicable; profit and loss forecasts for threeyears; pro forma income statements and balance sheets;


and a break-even chart. On the appropriate exhibits, or in anattachment, specify assumptions behind such items as saleslevels and growth, collections and payables periods, inven-tory requirements, cash balances, and cost of goods. Youranalysis of the operating and cash conversion cycle in thebusiness will enable you to identify these critical assumptions.

Pro forma income statements are the plan-for-profit partof financial management and can indicate the potential fi-nancial feasibility of a new venture. Because usually thelevel of profits, particularly during the start-up years of aventure, will not be sufficient to finance operating assetneeds, and because actual cash inflows do not alwaysmatch the actual cash outflows on a short-term basis, acash flow forecast indicating these conditions and enablingmanagement 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, inventoryturnover, and the like are within the acceptable limits re-quired to justify future financings that are projected for theventure. Finally, a break-even chart showing the level ofsales and production that will cover all costs, includingthose costs that vary with production level and those that donot, is very useful.

A. Actual income statements and balance sheets. For anexisting business, prepare income statements and bal-ance sheets for the current year and for the prior twoyears.

B. Pro forma income statements.

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

Fully discuss assumptions (e.g., the amount allowedfor bad debts and discounts, or any assumptionsmade with respect to sales expenses or generaland administrative costs being a fixed percentageof costs or sales) made in preparing the pro formaincome 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 theadverse impact of having to climb a learning curveon the level of productivity over time, that could pre-vent the venture’s sales and profit goals from beingattained, plus the sensitivity of profits to these risks.

C. Pro forma balance sheets. Prepare pro forma balancesheets semiannually in the first year and at the end ofeach 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 andtiming of additional financing and indicate peak

requirements for working capital. Indicate hownecessary additional financing is to be obtained,such as through equity financing, bank loans, orshort-term lines of credit from banks, on whatterms, and how it is to be repaid. Remember thatthese numbers are based on cash, not accrual,accounting.

Discuss assumptions, such as those made on thetiming of collection of receivables, trade discountsgiven, terms of payments to vendors, plannedsalary and wage increases, anticipated increasesin any operating expenses, seasonality characteris-tics of the business as they affect inventory require-ments, inventory turnovers per year, capitalequipment purchases, and so forth. Again, theseare real time (i.e., cash), not accruals.

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

E. Break-even chart.

Calculate breakeven and prepare a chart thatshows when breakeven will be reached and anystepwise changes in breakeven that may occur.

Discuss the breakeven shown for your venture andwhether it will be easy or difficult to attain, includ-ing a discussion of the size of break-even salesvolume relative to projected total sales, the size ofgross margins and price sensitivity, and how thebreak-even point might be lowered in case theventure 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, andhow 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 anydebts can be repaid, and so forth.

XIII. Proposed Company Offering The pur-pose of this section of the plan is to indicate the amount ofmoney that is being sought, the nature and amount of thesecurities offered to investors, a brief description of the usesthat will be made of the capital raised, and a summary ofhow the investor is expected to achieve its targeted rate ofreturn. It is recommended that you read the discussionabout financing in Part IV.

The terms for financing your company that you proposehere are the first steps in the negotiation process with thoseinterested 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 flowprojections and your estimate of how much money is




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 requirementwill be obtained by this offering and how much willbe obtained via term loans and lines of credit.

B. Offering.

Describe the type (e.g., common stock, convertibledebentures, debt with warrants, debt plus stock),unit price, and total amount of securities to be soldin this offering. If securities are not just commonstock, 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 completedor after exercise of any stock conversion or pur-chase rights in the case of convertible debenturesor warrants.

Securities sold through a private placement andthat therefore are exempt from SEC registrationshould include the following statement in this partof the plan:

The shares being sold pursuant to this offering are re-stricted securities and may not be resold readily. Theprospective investor should recognize that such securi-ties might be restricted as to resale for an indefinite pe-riod of time. Each purchaser will be required to executea Nondistribution Agreement satisfactory in form tocorporate 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 sharesthat they will hold after completion of the proposedfinancing.

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 isgoing 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 suchthings as product design and development, capitalequipment, marketing, and general working capitalneeds.

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

XIV. Appendixes Include pertinent informationhere that is too extensive for the body of the business planbut that is necessary (product specs or photos; lists of refer-ences, suppliers of critical components; special locationfactors, facilities, or technical analyses; reports from con-sultants or technical experts; and copies of any critical reg-ulatory 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 forwhich 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, youwill most likely overlook issues and treat aspects of yourventure in a manner that is less than clear. A good reviewercan give you the benefit of an outside objective evaluation.Your attorney can make sure that there are no misleadingstatements in your plan and that it contains all the caveatsand the like.


Finding the right date or partner for life is a daunting chal-lenge. Everyone agrees that certain chemistry can make orbreak a relationship. This is certainly true in new ventures.Today all the various social networking Web sites and theworldwide connectivity of the Internet have opened up vastnew opportunities to identify and build the most importantpart of the external team—the venture’s brain trust. As youhave seen (and will continue to see) in the text, cases, anddiscussions, ventures rarely succeed in isolation. Invariablythere are one or a few external mentors, advisors (who areoften also investors), coaches, and sources of great knowl-edge, insights, and contacts the venture desperately needsbut does not have. Members of your brain trust must be di-rect and honest and have your best interests at heart. Thesecan be very valuable individuals.

Consider the following example. Launched in 1997,ChinaHR.com was the first and is now one of the largest recruitment Web sites in China.5 Zhang Jiexian, who was once a HR manager and headhunter, had foundedChinaHR.com in a small hostel room. Initially there wereonly five employees, including two founders and two part-time workers. In the first two years, ChinaHR had almost norevenue model. The Web site’s recruitment service was freeand it was barely surviving on the headhunting business.The situation did not change until 1999 when Kathy Xu, at-tracted by ChinaHR’s business model and founding team,wrote a cheque of US$600,000 to the company and be-came its chairwoman.6

At that time Xu was the China head of Baring PrivateEquity Partners Asia. Since ChinaHR was very small andlacked a profit model, Baring refused to invest in it, so Xuinvested in ChinaHR privately. In 2004, Xu was selected asone of “The Most Influential People in Asia —Stars of Asia”by BusinessWeek. She founded the Capital Today Group in2005, and was awarded one of the “Top 10 Venture Cap-italists” by Forbes in 2006. To date, four entrepreneursbacked by her have been listed among the “Forbes Top100 Richest Men” in China.7

Xu brought ChinaHR not only financial capital, butmore importantly, the human capital that would help thecompany to grow. Says Xu, “It was very difficult to find peo-ple to work for such a small company like ChinaHR. I haveto tell people that ChinaHR is going to have a bright future,like the many other successful companies I have investedin.” Xu found an experienced manager for ChinaHR, andthe company grew rapidly in the first few years. However,

since the collapse of the Internet bubble in 2001, the company’s investment began to drain and its revenuedropped rapidly. In 2003 its revenue fell to 12 percent ofits competitor 51job.com. Xu realized that ChinaHR.comwas facing severe management problems, so she changedthe company’s CEO again in 2004. This time she hiredZhang Jianguo, then vice president of human resources at the telecom giant Huawei Technologies. Xu told Zhangthat she would give him a low salary; she wanted him to put his own money in ChinaHR so he would be fully devoted to the company. The “Huawei style” new CEO carried out radical reforms and built up a strong “wolf-spirite” corporate culture that emphasized responsivenessand perseverance.8 Besides, Xu began to emphasize sales:she built a strong sales and marketing team and appliedbranding strategy to ChinaHR’s products. Xu’s strategiesapparently worked effectively, as the company’s revenuedoubled in three consecutive years since 2004. In 2005,Monster.com bought a 45-percent stake in ChinaHR forUS$75 million, and to date, ChinaHR has grown into a bigcompany with over 1,400 employees.9

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 theVenture.Applying the Timmons Model to your opportunity and po-tential venture has put a zoom lens on each critical aspectof your venture—the opportunity, the resources, and theteam (internal and external)—and has revealed importantgaps and the extent of the fit in the venture. Remember,many gaps are uncovered by an honest assessment ofthe confidence you have in the critical assumptions you’vemade in your plan; the weaker your confidence, thegreater the need for brain trust support. These missingpieces in the puzzle will point to the facts, people, infor-mation, access, insights, and the like that your ventureneeds and that no team members currently possess; with-out these pieces, the venture will likely fail; with them, theodds for success rise. Make a list of these critical gapsand needs.


Exercise 2The Virtual Brain Trust

5 “About ChinaHR”, http://www.chinahr.com/english/recruiter/aboutus.htm.6 “The Fall of Venture Capital”, China Finance Press, pp. 10–12.7 Kathy Xu, “Three Ladies on Forbes”, August 9, 2006; “Finance First”, http://tech.sina.com.cn/i/2006-08-09/01391076892.shtml; Kathy Xu, China

Venture Capital Association (CVCA) Web site, http://www.cvca.com.cn/mail2010/Speakers_pdf/KathyXU.pdf.8 “The Fall of Venture Capital”, China Finance Press, pp. 10–12; Kathy Xu, “Three Ladies on Forbes”, August 9, 2006; “Finance First”,

http:// tech.sina.com.cn/i/2006-08-09/01391076892.shtml. 9 Stephen Glain, “Rainmaker”, Forbes Magazine, April 7, 2008, www.forbes.com/global/2008/0407/050.html.



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 thepeople you know, who can eventually lead you to a source.Networking sites such as Facebook, MySpace, and LinkedIncan be especially fruitful search platforms. Match this list ofpotential brain trust members to the list of critical gaps andneeds.

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 yourzoom lens. Dive into the nuances of the opportunity, theteam, and the minimal required resources you need to im-prove the fit by filling the gaps and managing risk andreward. Much will change as your idea evolves into abona fide opportunity and then into a live venture: attract-ing key team members, valuing the business, raising cap-ital, structuring and negotiating the deal, and other key

negotiations with key hires and suppliers. Trying to learnall the things necessary to succeed the first time by doingit 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 entrepreneurialcompetencies.

A Cautionary Word: Scammers and Predators

Unfortunately the Internet has its share of scammers andpredators. Be vigilant and thorough in checking outpotential contacts! Ewing M. Kauffman always advisedthat “you should trust people” rather than assume theyare all out to cheat you, lie to you, scam you, or stealfrom you. It’s certainly true that at least 95 percent of thepeople you will encounter in your journey can be trusted.Just keep in mind the old adage: Trust everyone, but al-ways cut the deck!


Preparation Questions1. Discuss the process that Sarah Foster and her part-

ners have gone through to bring to market theirmedical device. How might they have avoidedsome of the pitfalls they have encountered?

2. Examine Newland’s strategy in light of thespecial circumstances in this industry. What isyour recommendation for moving the companyforward?

3. In light of your strategic plan for Newland Med-ical, how can Foster achieve a balance betweenher personal and professional objectives andcommitments?

It had all seemed like a perfect plan. With two assertiveangel investors guiding her medical device company onwhat seemed to be an acquisition fast track, Sarah Fos-ter and her husband decided that the time was right tostart a family. However, by the fall of 2005 (the middleof her first trimester), everything had changed.

Foster, cofounder and president of Newland Med-ical Technologies, was now compelled to seriouslyreconsider the course she’d set for her company. Indoing so, she was going to have to make some toughchoices to strike a balance between motherhood andher professional passions.

Opportunity Recognition

Sarah Foster had been working with hip implant designsfor Johnson & Johnson in Massachusetts for two yearswhen the corporate office announced they were movingher division out west to Iowa. Foster loved the work, butshe and her husband, a professor at a local college,also loved living in the Boston area. She passed on theoffer and instead leveraged her engineering degreesfrom MIT and Stanford to secure employment close tohome (see Exhibit 1). Still, the bright engineer never lostsight of her primary career objective:

I had been looking for a medical device opportunityever since I left Johnson & Johnson. Then a friend ofmine—a urologist at the Brigham and Women’s Hospi-tal in Boston—told me how there was a need for betterstents1 in urology, since most of the industry focus hasbeen in cardiac work. He pointed out that even thoughit was commonly known that the ureter naturally dilatesin 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 andmight even help pass kidney stones.

Kidney stones, or ureteral stones, were a debilitatingmalady that affected nearly 10 percent of the U.S. pop-ulation. The pain of stone disease was most severewhen the stone lodged in the ureter and obstructedurine flow.

A patient arriving with kidney stones was usuallytreated as an emergency. The emergency room physi-cian would administer pain medication and almost al-ways consult a urologist. The immediate and near-termtreatment had to be safe and effective and keep the pa-tient’s options open for later procedures.

By the late 1990s, most urologists were meeting theseneeds with the “Double-J”—a standard polyurethanestent inserted into the ureter to relieve pain by allowingurine to flow around the stone. With the Double-J,stones often remained in the ureter; the choice of proce-dure to remove such stones was related to the size andlocation of the stone, as well as access to sophisticatedequipment.

Patients with stones smaller than 5 mm typicallywaited in pain a few days or up to several weeks for thestone to pass. Larger stones were broken up using ultra-sound and laser technologies—leaving fragments toosmall to retrieve but plenty big enough to ensure apainful passing. Basketing was a secondary procedurethat was very effective in removing individual stone frag-ments, but it required a skilled surgeon and an extendedoperating time (see Exhibit 2).

In the winter of 1999, Foster and Dr. Grainer be-gan brainstorming a sheath-covered stent that couldbe deployed in the same manner and with the samematerials as the Double-J. Once inside the ureter, thesheath would be removed, and their stent would en-large the passageway with a series of expansionbulbs along its length (see Exhibit 3). While their aimwas to relieve urine flow to a greater degree thancompetitive products, during their initial trials on pigsthey noticed that as the device was slowly withdrawnfrom the ureter, stones became trapped in the basket-like bulbs. Direct and atraumatic removal of stonesfrom the ureter had never been done before; now theyhad their product.


CaseNewland Medical

Technologies

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

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



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 Scientific, Inc.; competitive analysis and e-commerce initiatives.• Entrepreneurship Intensity Track program, Hatchery company.

1996–1997 STANFORD UNIVERSITY Stanford, CAM.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, MAB.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 and running the business.

2002 PERCEPTION ROBOTICS, INC. Waltham, MAKauffman 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, MADesign 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, MAProject 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, DCAnalyst, Strategic Industries Branch• Researched new technological developments in foreign countries, briefed division heads.• Wrote articles in specialty field for internal publication to decision makers.

1995 MISSILE & SPACE INTELLIGENCE CENTER Huntsville, ALIntern, Surface to Air Missile Division• Researched modifications 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.


The SRS

To emphasize what they now saw as the primary attrib-ute, Foster and Grainer named their device the StoneRemoval Stent (SRS). A new series of animal trials led tothe following procedure outline:

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

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

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

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

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

Throughout 2000 and into 2001, Foster took chargeof the effort as Grainer returned to his full-time practice.She raised money from friends and family to secure apatent 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 wouldneed to attract professional investors.

Target Market

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


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



States, about 7 percent of all hospitals. Over $2 billionwas spent every year on treating kidney stones. The av-erage per patient annual expenditure was in the rangeof $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 SRShad proven effective in capturing smaller stones thatwere currently left painfully untreated, she added in 75percent of those for a total U.S. market of 800,000 tar-get 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 urologistsand 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 ad-ministrators kept an eagle eye on the costs and wereoften strongly influenced by reimbursement procedurepolicies set by the Center for Medicare and by MedicaidServices. One method hospitals used to cut costs was toorder aggregated packages of devices and services fromhighly 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 pa-tient comfort and safety, risk, and reimbursement. Adecision to try an innovative device was most oftenprompted by a visit from a trusted sales representative.In making that decision, the urologist would be most in-fluenced by endorsements from academically respectedcolleagues and from sound technical data from clinicalstudies. In 2001 there were just over 7,100 licensed

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 ed-ucated about options and could therefore be strong in-fluencers. Patient concerns included relieving immediatepain, avoiding invasive procedures, and the definitiveremoval of the stone. Kidney stone patients were mostoften 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 mar-ket 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 notpurchased on the basis of any technological superiority.

Revenue leader Boston Scientific had made many ac-quisitions. This suggested to Foster that their internalR&D structure did not provide the company with suffi-cient numbers of new innovations. Unit leader ACMIwas 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 lithotripserswere also suppliers of ESWL accessories such as waterbags and fluids. Foster reasoned that large sellers likeDornier MedTech and Siemens Medical Systems mighthave an early-stage interest in a product like the SRSbecause 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 partneror parent. Major players in the industry, with their estab-lished and credible sales and marketing capabilities,

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

tim81551_ch08IT.qxd 1/19/12 12:05 PM 1

could significantly affect the speed of adoption of newdevices.

Unlike most ventures, the strategy would not be to goup against top competitors, and investors would have lit-tle interest in closely monitoring the usual metrics such assales revenues, gross margins, and projected net in-come. The objective would be to establish a followingamong the best medical practitioners in the world—even if that meant giving away the stents for free. Fosterfelt that once the SRS had proven market demand, thecompany would then have an excellent chance of beingacquired.

Start-Up

Working part-time, Foster completed the business planin the late summer of 2001. Because an acquisitionharvest could not be accurately timed or priced, finan-cial projections for the company she had named New-land Medical Technologies followed a standard sce-nario of steady growth (see Exhibit 6). By the spring ofthe following year, she had raised just over $600,000in seed capital from friends, family, Grainer, and herown savings. When she began to discuss assembling acohesive venture team, Foster was surprised to learnthat Grainer had been assuming all along that shewould serve as president and CEO. While she wasvery excited about the opportunity, she also knew whatshe didn’t know:

To do it the right way, I was going to need some practicalbusiness education. In the fall of 2002, I was acceptedinto the MBA program at the F.W. Olin Graduate Schoolof Business [at Babson College in Wellesley, Massachu-setts]. I then switched jobs, to a position with a well-defined, short-range end point.

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

Professor Boulnois2 had come up with the idea of takinga two-tiered approach. First we got the SRS approved asa basic drainage stent—no problem there. When wefiled our follow-on application with a different indication—stone removal—we got lucky because we had the samereviewer for both applications. She saw that it was theidentical device that she had just approved, with a newindication, and because of that, we received that nextapproval in less than 30 days. And because stents arean established category of medical devices, we got our


EXHIBIT 5

Competitor Profiles

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),Scientific) (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, wasfounder and president of Interactive Consulting, Inc., a managementconsulting firm specializing in business development for Europeanearly-stage medical technology companies entering the U.S. market.



reimbursement codes in far less time than it would nor-mally take a company with a brand new technology.3

While attending the Olin School, Foster spent muchof her time looking for the $1.7 million in venture fund-ing she estimated Newland would need to commercial-ize the SRS device. After pitching her plan to numerousinvestors, angel groups, and business plan forums inthe Boston area, Foster came across a business devel-opment foundation in Rhode Island. They agreed to putup $65,000—as long as 20 percent was spent directlyin Rhode Island. As a result, Foster began working witha company in that state to produce prototypes in amanner that would satisfy the stringent FDA productionand quality requirements. The company was also offer-ing a total solution under one roof—from extrusion topackaging.

By the time she had graduated in January 2004,Foster had attracted two additional team members—anengineer she had met at a previous job and a businessdevelopment talent who had approached her at a busi-ness plan forum. Because she had no money to pay

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 25,377,406Percentage of Revenues 53.5% 67.9% 70.3% 72.9%

Operating ExpensesSales & Marketing 166,200 939,900 1,573,016 2,379,059 2,858,596Research & Development 225,240 448,795 600,140 947,216 1,105,338General & 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 CostsAverage Material Cost per Unit 8Average Labor Cost per Unit 14Sterilizing and Packaging per Unit 8Manufacturer per Unit Markup (20%) 6

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

Indirect CostsSalaries and Benefits 84,750Facility; Shipping 7,210Depreciation 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 venturesseeking to commercialize a medical device product. The CMSwas charged with the subjective task of evaluating the costs andbenefits of particular technologies—an evolving field with plentyof room for debate. Reimbursement issues could be so complexand complicated that receiving payment for new products hadbecome the greatest stumbling block for early entrants—andCMS was only one piece of the coverage approval puzzle. Toachieve reimbursement coverage and payment throughout thecountry for a new technology, medical device ventures were re-quired to weave their way through a maze of several hundredpayers. Moreover, new products had to struggle to get assigned aunique code that would distinguish them from existing technolo-gies. Even after that code was assigned, it might take severalyears for Medicare to recognize that device as a new cost. Sincehealth care facilities wouldn’t use products that had not receivedproper payment approvals, it was not unusual for reimbursementgaps to derail the implementation of viable, FDA approved med-ical device innovations.


them, in both cases she offered to “back pay” theirearned salaries from the next round of funding she ex-pected to raise.

Even though the economy had substantially recov-ered following the 2001 recession, investors were stillvery cautious. Ever since they had received FDA ap-proval, Foster had been meeting with and receivinghelpful feedback and additional contacts from numer-ous venture capitalists. She finally concluded, however,that Newland was at too early a stage for that type ofinvestor.

At a business plan competition in spring 2004, a fel-low Babson graduate recommended that she speak withhis uncle, a local philanthropist and retired venture in-vestor. Foster recalled that at first the lead appeared tobe yet another dead end:

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

Cunningham invested $250,000 and attracted twoother local angels, who each invested $75,000. Thecapital was a long way from full funding, but it pro-vided sustaining salaries for the team and a one-roomincubator space in Boston’s south end—halfway be-tween two major medical research centers. Their prox-imity to those research labs would prove immediatelycritical.

Setbacks

By getting to know the researchers at the animal testingfacilities at New England Medical, Foster noted thatthey were able to further Newland’s research at almostno cost:

The labs were doing their cardio work on pigs in themorning and working with the urinary tract systemmost every afternoon. They were curious about the SRScapabilities and were willing to add our stent to theirwork with the ureters. It was great; we didn’t have tohang around for it, and we could just walk over to dis-cuss what sorts of indications and challenges they hadidentified.

While pre-FDA approval trials had confirmed that theSRS would perform as expected once the device wasplaced in the ureter, these latest tests brought to lightsome serious design flaws. Foster explained,

Back when we started, the first five stents we de-signed wouldn’t fit in the ureter. So our focus becamemaking the baskets small enough to fit inside asheath. We made a bunch, and when 15 in a row de-ployed successfully and worked as expected, I imme-

diately began to move forward on developing thebusiness plan. Then when we got FDA approval andthe reimbursement codes, I figured we were ready togo out into the market.

The problem was Dr. Grainer and I hadn’t talked toenough doctors early on when we were still in thatdesign stage. For example, we chose an insertion guidewire that was larger than the standard—but one that anadvisor said ought to be fine. We had created a devicethat worked—it could stay in the body, it dilated theureter, patients didn’t feel any pain, and it caughtstones—but because our design was far more difficult toplace than a standard stent, we had failed to create asalable product. When it became clear that this wasnever going to take off as a commercial venture, wewent back to the drawing board.

Significantly compounding this challenge was thather chosen manufacturer had turned out to be not evenremotely capable of being a one-stop shop. As a result,the team was compelled to assemble a supply chain ofspecialists: an extruder, a fine-tooling shop, a coatingcompany, a sterilization expert, and a medical pack-ager. Although Foster was pleased that this arrange-ment gave them more control over quality at each levelof production, she understood that the need to pass offwork-in-process between several companies would ex-tend lead times and increase the possibility of commu-nication challenges. From a strategy perspective, sheexplained that developing a single-site manufacturingcapability may not have been the way to go anyway:

I have found no consensus on whether medical devicecompanies like ours should spend time and money per-fecting a manufacturing capability. Some investors feelthat 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 wouldacquire 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 ofphysicians—began their full-scale effort to build a criti-cal mass of advocates and attract at least one major dis-tributor. 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 majormarkets in the United States.

Meanwhile, Foster focused on raising funds to re-store coffers depleted from the struggle to get back tothe point where they had thought they had beenmonths earlier. At an angel investor breakfast in lateMay, she met a pair of harvested entrepreneurs looking




for investment opportunities. Chris Fallon had made hismoney when his single-product banking software ven-ture was acquired by a major financial corporation inNew York. Claudia Grimes was the cofounder of anadventure sports vacation portal that was snapped upby a multinational travel agency—just eight months af-ter her venture had proven sales and profitability.

Both investors expressed interest in Newland, partic-ularly because they felt that the company was at anexcellent 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 developmentmilestone like proof of concept on animals, after FDAapproval, after a series of successful clinical trials, andafter your first million or so in sales.

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

One constituent that was not pleased with what theysaw as an abrupt shift in strategy was Taylor MedicalSupply. Foster thought that their displeasure was partic-ularly acute because of the way they learned about thechange:

Things had started to move very fast. We chose an in-vestment banker whose initial task was to act as an in-termediary between Newland and potential buyers. Hecalled TMS to let them know we were pursing an acqui-sition, and to ask if they wanted in on it. They were def-initely taken aback. They told the investment banker thatfrom their perspective we’d been moving toward a dis-tribution deal. That was news to me; they had neverseemed more than lukewarm about taking on our de-vice. Not only did they decline to put in an offer, butthey suspended their test marketing of the SRS. Still, theydid indicate that initial feedback from their clients hadbeen very positive.

With endorsements from two prominent medical cen-ters, and a few promising acquisition prospects consider-ing the possibilities, it seemed that momentum was build-ing for a speedy harvest. Encouraged by Newland’sprogress, that summer, Foster and her husband ran thenumbers—with an allowance for misconceptions—andestimated that it was an excellent time to start a family.On paper, their planned parenthood coincided wellwith the harvest schedule that Newland’s newest in-vestors were espousing. The couple was a bit shocked,but thoroughly delighted, when Foster became pregnant

that very month. Well, she mused, maybe the acquisi-tion strategy would continue to charge down a similarfast track. It didn’t.

A Fork in the Road with a Baby on Board

Despite assurances that all was going according totheir plan, by the fall Foster was having a hard timedealing with the aggressive angels she’d brought on.The nature of the relationship provided them with agood deal of latitude with regard to setting the paceand direction of the acquisition strategy that Foster andher original investors had signed off on, and it wasn’tlong before Fallon and Grimes began to demandchanges in the deal structure that would provide themwith better returns.

In mid-October 2005 their investment banker broughtan offer to the table from a middle-tier medical supplydistributor based in Florida. The $9.5 million term sheetprovided a generous five-year earn-out for Foster and herteam—provided they stayed on in Boston to develop aline of innovative stents. The terms also required that Fos-ter serve as president, and it was contingent upon FDA ap-proval of Newland’s latest innovation—now in early tri-als.4 The offer provided no funds to make that happen,and when Fallon and Grimes said that any further capi-tal would have to come with additional equity, Foster fi-nally decided to confide in her original investors:

I had kept Chris Cunningham and his group apprised ofour decision to seek an acquisition, and they hadagreed with that. But these two entrepreneur angelswere so difficult to work with, and neither of them hadany experience in the medical industry. Maybe that’snot a crucial requirement, but overall, they just didn’tseem to get what we were about. Mr. Cunninghamlooked 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 eq-uity split, or the harvest: it was about developing newand exciting medical products that could make a differ-ence. Nevertheless, as president she felt that if Newlandcould strike a deal with a large company that wouldgive current investors a decent return and provide

4 Newland Medical was working on a line of stents designed to hold theureter open against, for example, external compression from a tu-mor. Newland’s ureteral structural stents would be significantlymore resistant to compression than any product that was currentlyon the market. These devices would allow patients with locally andregionally 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 onurinary passageways, the team estimated that this represented a$25 million market opportunity.


Newland with a base of resources to further new prod-uct development, then that was the path she ought topursue. On the other hand, staying the course and build-ing a line of innovative products would significantlyincrease their acquisition value.

If not for her pregnancy, Foster wouldn’t hesitate fora moment; she’d return to their original strategy—and to

her passion for building an innovative medical deviceenterprise. To pursue that course now, however, shewould be facing the prospect of being a new motherand running a growing business. With an offer on thetable and funds running short, she swallowed hardagainst a particularly acute bout of morning sickness. Itwas time to make some tough decisions.



the business plan - chinnovate and share ideas about the newland medical technologies case study,...

Documents