I have just returned from two fantastic days in Algeria. As part of my small business consulting for startups, I was helping the team from Ooredoo (a major mobile operator) that runs the first startup incubator in Algeria. The incubator is part of a joint initiative between the company and the Algerian Government called tStart. My role was to educate them about business plans. It was a great experience and I learned a huge amount from the group that I worked with. You can read more about the trip in my LinkedIn post here.
I have written a fair bit about business plans in the past. (If you sign up for my mailing list I will send you copy of my eBook - The Book of Business Plan Ephemera 2014.) This trip gave me a chance to pull together my thinking and create a bit of a guide for early stage startups. This post summarises some of the highlights. Get in touch if you would like to find out more.
Don't Panic - Its Only a Plan
To start with, don’t get hung up on the term “Business Plan.” People attach a lot of meaning and support it by much technical theory. Most of this is irrelevant when you start. In fact most of it is over complicated BS for any business. The main thing you need to do at any time is think about what is next for your business. That is, make a plan.
At some points someone will come along and ask you to write down your plan. For example, when you apply to an accelerator or incubator, when you pitch for investment and so on. When this happens you need to tell the story of your business, you need to paint a picture of the future and write down what comes next. Simples.
Every business plan, whether for yourself, your team or a pitch is written at a point in time. You can only tell the story of what you have achieved to that point. You can only know the next couple of steps. Be credible, passionate and honest about these things. Don’t stress about all the stuff you don’t know.
Be Upfront About The Journey
From Idea To Your First Business Plan
A startup is a journey. Your business plan will reflect where you are on that journey. A company with no product and no customers that applies to an incubator. It will not have detailed financial projections. In 6 months when you apply for seed funding you might have initial traction and be able to build a model on some limited assumptions. A year after that when you are growing fast your numbers will be even better. Recognise where you are in the journey and reflect in any plan.
Entrepreneurs live with uncertainty every day. The business plan needs to show what you do know. Then you can be ambitious but honest about the unknown. Your plan will be to learn more about your customers so that you improve your business. Investors understand this. If they want more certainty before they invest they will tell you. For example “We will invest when you show real traction.” That’s OK.
Don’t pretend you know something you don’t. In the end anyone who invests on this basis will be deceived.
At the beginning of the workshop in Algeria, I asked everyone what they were hoping to learn over the two days. Several of the team asked “How do you go from an idea to your first business plan?” Good question, how do you start? At this point you know almost nothing. You may have discussed your idea with a few people but no more. Often the first months are a process of adding to the list of things you don’t know. Scary. But also reality.
To go from an idea you talk about over a coffee to a fledgling business your “plan” needs to answer a small number of basic questions:
Once you have these answers you have the outline of a plan. This is what the application form for an accelerator programme wants to know. Time to take the plunge. Either go with the business or not.
Understand and execute Your Customer Discovery
Next steps always need to be specific planned actions. No-one succeeds in business without a bias to action. No-one invests in a team which does not get stuff done. Right at the start these actions will concern two things: building a product and customer discovery.
I am not going to focus on product build in this post but I will be writing soon about product build for non technical people. Founders who code just get on with it anyway.
Just building product is never enough. From day one you need to be out finding out about potential customers. It is vital not to confuse this with sales and/ or marketing. Sales and marketing can only start when you have a value proposition. You can only define this by getting out of the building and talking to potential customers. Listen to their problems and design something which meets their needs. Then go back and talk again. Refine your design and do it again. Repeat until you have something people will use and people will pay for.
You also need to be able to describe the people who will use your product. And the people who will pay which may not be the same thing. Only then can you define a market and a proposition. Now go ahead and sell!
Their is a massive pile of startup literature available. By all means keep reading and learning as much as you can. But time is limited so if you only read a couple of books then this is the area to focus on. Read The Lean Startup (what) and The Mom Test (how) . If you want more detail then read 4 Steps To the Epiphany as well. Make sure you understand Customer Discovery. And how to do it.
Get This One Thing Right: Talk To Real Customers
Every number, every assumption, every estimate in your business plan is built on this. Once you are selling and marketing, you are still doing customer discovery. It feels different but each transaction, each churn, each wow moment helps you learn. When your startup is mature enough to include addressable market or financial forecasts remember this point. Start your numbers from real data based on real customer interaction. No matter how small. Be clear about the assumptions you have used based on this customer interaction. By all means make them ambitious. But start from something real.
I hope the last paragraph is clear. Please let me know if it is not. This is the biggest mistake I see in startup plans. Too often I see a statement like “Gartner estimate the global market for Girl Scout Cookies will be $100 billion. We will take 1% of that market in five years.” No. When you have real customer feedback that shows your product solves a problem. And that problem is relevant to the market Gartner (or whoever) has forecast then you can use external validation. Not before.
Choose The Best Startup Business Model For Your Company
Traction - There is no Number 5
Enough ranting. Once you start to have customer data the next big piece of the jigsaw is your business model. In simple terms this means how will you make money. Investors love this part!
There are many proven business models you can use. I have written about the six most common here. Each provides a powerful language to explain your business to investors. Good investors are familiar with the mechanics and metrics of a proven business model. It helps them understand your business and shines a,right on your vision, strategy and so on.
But you need to choose the right model. Sometimes this obvious. If you are selling stuff online you will have an eCommerce business model for example. Often it is not. You need to understand how customers value your product and how they like to buy. Then develop a business model that works for real customers. Use a proven model but build it into the specific approach which suits your business and your customers.
Slack is a great example of this approach. Its business model looks like a simple SaaS freemium model. It varies in two important ways. The benefit of paid plans is usage (history and integrations) not features. You only pay for active users. These small changes have helped it become a Unicorn in record time.
Once you have a business model and some real customer feedback you can interest investors with one more thing. Traction. Few external investors show interest without at least some sign that you can succeed in the market. The more signs you have, the greater the confidence of your audience. But it must be real. Traction only comes in 4 ways:
These are in order of importance - number 1 is worth more than number 2 etc. There is no number 5. Traction only comes from real customers.
And Tell Them About The Team
The biggest single differentiating factor for investors is the team. The same principle applies if you are planning just for your own business. Having the best people doing the right things is the recipe for success. This hard to capture in a written plan but there are a small number of things investors will look for:
Final point. In a business plan written to pitch for investment, tell investors what you are asking for. How much money. For what share. How will you spend it. You may get offered more. You may get offered less. But take an opening position.
That’s all. The picture below shows you the list of what you need. Not long and not scary. Good luck.
Kenny Fraser is the Director of Sunstone Communication and a personal investor in startups.