1
Table of Contents
1 The Route from Concept to Company 2
11 Success factors 2
12 Stages of development 3
2 The Business Idea6
21 Developing a business idea 6
22 Elements of a promising business idea7
23 Protecting your business idea 10
24 Presenting your idea to investors11
3 The Business Plan13
31 Advantages of a business plan13
32 Characteristics of a successful business plan13
33 The investor’s point of view15
34 Tips on preparing a professional business plan17
4 Structure and Key Elements of a Business Plan19
41 Executive summary19
42 Product or service 21
43 Management team22
44 Market and competition 24
45 Marketing and sales27
46 Business system and organization 32
47 Implementation schedule 36
48 Opportunities and risks 38
49 Financial planning and financing38
2
Exhibit 2
KEY FACTORS FOR SUCCESS OF INNOVATIVE STARTUPS
Ideas
Degree of
innovation
Scope
Patent
Capital
Availabilityamount
Needs
responsibilities
Exits for investors
People
Inventors
Entrepreneurs
Team
members
Traditional service
providers
Attorneys
Patent lawyers
Tax consultants
accountants
Market
researchers
Network and exchange
Coaching
Networking
Team building
Innovative service provider
–Venture capitalists
–Headhunters
–Angel investors
–Hightech startup
consultants
1 THE ROUTE FROM CONCEPT TO
COMPANY
New innovative companies generally try to grow from startups into established companies
within 5 years But they can seldom finance their activities alone along the way Rather they
are dependent on professional investors with considerable financial clout For entrepreneurs
financing is a critical question – the business plan must thus be considered from the point of
view of potential investors right from the outset
11 Success factors
Successful companies arise from a combination of five elements (Exhibit 2)
1 No business concept no business
Having an idea is just the beginning of the creative process Many entrepreneurs are initially
infatuated with their inspiration losing sight of the fact that their idea is the point of departure
for a long process of development which must face – and withstand – tough challenges before it
can enjoy financing and market success as a mature business concept
2 Money matters
Without somebody who invests money into the idea to grow it into a viable business this
business will never become a reality From early on therefore much attention must be paid to
convincing investors to provide the necessary funding
3
Exhibit 3
STAGES OF STARTUP DEVELOPMENT
Business idea
generation
Business plan
preparation
Startup
and growth
Established
company
Interest of
investors
Financing
decisions
Exit of
initial
investors
3 No entrepreneurs no enterprise
Growing new firms is not a oneperson job It can only succeed with a team of usually three to
five entrepreneurs whose talents are complementary Putting together wellfunctioning teams
is a difficult process – one that takes time energy and an understanding of human nature Do
not lose any time in putting your team together and work on perfecting it throughout the entire
startup process The characteristics of a highperformance management team are discussed in
more detail in section 63 of this Guide
4 Traditional service providers will help you clear the first hurdles
You will often need the advice of professional service providers such as patent lawyers tax
advisors and market researchers especially at the beginning Getting the right information
early (eg for registering a patent) can have consequences for later success or failure
5 Strong networks are a shot in the arm for every new company
Professional guidance for potential entrepreneurs through a network of sponsors entrepreneurs
venture capitalists and service providers is decisive in transforming viable ideas into real
companies Prime examples for such regional networks can be found in Silicon Valley and the
Boston area
12 Stages of development
The typical progression of the startup and development of growing companies into established
firms can be subdivided into three stages The end of each stage serves as a milestone for
venture capitalists by which to gauge the status of their investment Being familiar with each
stage and the challenges it poses may spare you wasted energy and disappointment Please
note however that the three stages in the development of a functioning startup do not match
the three phases in the development of a business plan within the framework of this
competition (see Exhibit 3)
If you intend to be successful this startup process should influence both your activities as the
initiator of a business concept and your path toward forming your own company To a large
extent it is the demands of investors that will determine how you must approach the individual
stages of the startup
4
Stage 1 Business idea generation
The beginning is the inspiration – your solution to a problem It must be evaluated to
determine if it delivers an actual customer value whether the market is big enough and just
how big it will be The idea itself has no intrinsic economic value It acquires economic value
only after it has been successfully transformed into a concept with a plan and implemented
You will need to start putting together your team as soon as possible finding partners who can
develop your product or service until it is ready for market (or at least until shortly before) In
the case of products this stage usually involves a functioning prototype You will most likely
have to do without venture capital during this stage You will still be financing your plan with
your own money help from friends perhaps state research subsidies contributions from
foundations or other grants Investors refer to this as seed money as your idea is still a
seedling not yet exposed to the harsh climate of competition
Your objective at this stage is to present your business concept and market – which forms the
foundation of your new company – so clearly and concisely as to pique the interest of potential
investors in helping you cultivate your idea further
Stage 2 Business plan preparation
At this stage it is most important to focus on the big picture Don＇t lose sight of the forest for the
trees The business plan itself will help you to focus as you must consider and weigh the risks
involved prepare for any contingency and learn to anticipate a variety of possible situations or
scenarios You will need to lay down plans and create a budget for the key activities of the
business – for development production marketing distribution and finance Naturally you
will need to make many decisions such as which customers or segments will you target What
price will you ask for your product or service What is the best location for your business Will
you handle production yourself or outsource it to third parties And so on
In preparing the business plan you will come in contact with many people outside your startup
team In addition to investors you will talk to many specialists including attorneys tax
advisors experienced entrepreneurs and experts The business plan competition organizers
will help you get in touch with just the right people You will also have to begin reaching out to
your potential customers (ie by means of consumer surveys) to make initial assessments of
your market Always keep in mind that customer acceptance is an essential prerequisite to the
success of your company Scout about for possible suppliers and perhaps close your first
agreements You will also want to become aware of who your competitors are
This whole process will not come cheap The team must continue to earn a living while running
a rudimentary operation and perfecting a prototype Yet at this stage you should also be able
to estimate your expenses Financing will generally still be provided from the same sources you
relied on during stage one although some investors may be willing to make the occasional
advance This stage concludes successfully for you as a new entrepreneur when an investor
expresses a willingness to finance your undertaking
Stage 3 Startup and growth
5
Now that the conceptual work is largely complete it is time to start implementing your
business plan Your role now changes from that of architect to that of builder Business success
must now be sought and achieved in the market The day of reckoning has come when you will
learn whether your business concept was a good and ultimately profitable one
Investor exit en route to becoming an established company
The pullout of your initial investors is a completely normal step in the development of a startup
For if everything has gone well your risky venture will have gradually become a stable
enterprise (see Exhibit 4) In the course of its short life you have created a number of jobs and
wooed many customers with your innovative solution to their problem Your commitment is
paying off as the value of your business increases
A profitable exit has been the objective for the venture capitalist from the outset Capital
recovery can happen in very different ways Normally the business is sold to a competitor
supplier or customer Or it is listed on the stock exchange (the initial public offering or IPO)
It is also possible for investors who want out to be paid off by the other partners
6
2 THE BUSINESS IDEA
There is nothing in the world as
powerful as an idea whose time has come
Victor Hugo
The above statement undoubtedly applies to ideas for starting a new business But how do you
come up with such an idea And how can you know if the idea for the business will have a
promising future
Studies show that the lion＇s share of original and successful business ideas were generated by
people who had already had several years of relevant experience Gordon Moore and Robert
Noyce for example had a number of years at Fairchild Semiconductors behind them before
teaming up with Andy Grove to form Intel But there are also examples of revolutionary ideas
brought to life by mere novices as Steve Jobs and Steve Wozniak demonstrated when they
dropped out of college to start Apple Computer
21 Developing a business idea
In economic terms a spark of genius is worthless no matter how brilliant it may be For an idea
to grow into a mature business concept it must be developed and refined usually by many
different people
The initial idea must first pass a quick plausibility check
Before you follow up on an idea you should evaluate it in light of its (1) customer value
(2) market chances and (3) degree of innovation as well as considering whether it will be
both (4) feasible and profitable
Talk your idea over with friends professors experts and potential customers
The broader the support you find for your idea the better you will be able to
describe its benefits and market opportunities You will then be well
prepared when the time comes to discuss your project with professional
investors
Is your idea really novel Has someone else already developed it or even
applied to patent it
Will it be possible to develop your idea in a reasonable period of time and
with a justifiable level of resources
It takes at least four weeks to develop a business idea
Considering the multiple stages of development it is improbable – and fairly unrealistic – that
you will spend fewer than four weeks developing your concept Generally a business idea is
not worthy of being financed until it is so concrete that it can be launched in the market in the
foreseeable future at reasonable risk Investors talk of the seed phase of a business concept
7
5
ELEMENTS OF A PROMISING BUSINESS IDEA
Exhibit 5
Clear
customer
value
Market of
adequate size
Feasibility
and
profitability
Sufficient
degree of
innovation
1 2
4 3
which usually has to be financed with soft money (ie from sources that as yet place no hard
and fast demands on the success of the idea)
The seed phase can take longer in particular if the idea is ahead of its time Although the
perfect product has been found it cannot yet be marketed because the development of
complementary technologies or systems is still in the works One example is the Internet The
ideas for marketing products and services came early but a lack of security in the available
payment systems hampered and delayed its commercial exploitation for some time
22 Elements of a promising business idea
A business idea can be considered promising if it has the following four elements (Exhibit 5)
1 Clear customer value
The key to success in the marketplace is satisfied customers not great products Customers
spend their hardearned money to meet a need or solve a problem The first principle for
developing a successful business idea is that it clearly shows which need it will fulfill and how
it will do so Initially many entrepreneurs have the product and the technical details of design
and manufacture in mind when they speak of their solution Not so for the investor – the
investor first looks at the idea from the perspective of the market For investors customer value
takes top priority and everything else is secondary What＇s the difference If innovators say
our new device can perform 200 operations per minute or our new device has 25 fewer
parts they are focusing on the product By contrast saying our new device will save the
customer a quarter of the time and therefore 20 of the costs or our new solution can boost
productivity by up to 25 adopts the customer＇s point of view The product is merely a
means of delivering value to customers
The customer value of a product or service expresses what is novel or better about the item
when compared to competitive offers or alternative solutions As such it plays a key role in
8
setting your product apart from others – a core issue in marketing as we will learn – and is
essential to the market success of your business concept Try whenever possible to also
express the customer value in figures
Marketing theory states that the customer value must be formulated into a unique selling
proposition or USP This means two things First of all your business concept must be
presented in a way that makes sense (selling proposition) to the customer Many startups fail
because the customer does not understand the advantage of using the product or service and as
a result does not buy it Secondly your product must be unique Customers shouldn＇t choose
just any solution that hits the market – they should choose yours You must therefore
persuade them that your product offers a greater benefit or added value
Only then will your customers give you an edge In describing your business concept you need
not present a fully formulated USP but it should be more or less obvious to potential investors
2 Market of adequate size
A business idea will have economic value only when it succeeds in the market This second
principle of a successful idea demonstrates how big the market is for the product offered which
target group(s) it is designed for and to what degree it will differ from the competition
A detailed analysis of the market is not yet necessary at this point Estimates derived from
verifiable basic data will suffice Sources could include official statistics information from
associations articles in trade journals the trade press and the Internet It should be possible to
draw a reasonable conclusion about the size of the target market from this basic data It is
sufficient for you to summarize the results of this investigation in your presentation of the
business idea
The same is true for your target customers you will only need a loose definition of who they
will be Describe why your business idea will provide a special value to this group in particular
and why this group is financially the most interesting to you
You will always face competition – both direct from companies that offer a similar product and
indirect from substitute products that can also fulfill the customer＇s need A pasta
manufacturer competes not only with other pasta manufacturers but also with manufacturers
of rice and potato products and bakeries and more generally with manufacturers of all other
food stuffs Your business idea will need to demonstrate that you have understood who your
competitors are Name them – and describe why and how you can take the lead with your
business idea
3 Sufficient degree of innovation
Business ideas can be classified along two dimensions productsservices and business systems
In each of these categories you can develop something new or capitalize on something that
already exists Simplified a business system is a way of understanding how a product or
service is developed manufactured and marketed (Exhibit 6)
The term innovation is generally used in the context of new products which are made with
conventional production methods and delivered to the customer through existing distribution
9
channels Microsoft for instance developed DOS making use of the IBM sales organization to
bring it to the market
Innovations in business systems are less obvious but just as important The success of Dell is
attributed to significant cost savings thanks to a new form of direct distribution and a novel
production process in which a computer is produced only after it is ordered and in the shortest
possible time frame
In developing new products improvement of the multilayered dimension customer value is
at the forefront Innovations in the business system are targeted at lower costs and faster
processes savings which can then be passed on to the customer in the form of lower prices
It is rare that both types of innovation – in product and business system – can be combined to
create a completely new industry Netscape contributed significantly to the success of the
World Wide Web by distributing its new browser over the Internet free of charge In doing so
Netscape passed up initial sales revenues but through the increased number of visitors to its
Web site succeeded in raising advertising revenues
4 Feasibility and profitability
Finally to arrive at an actual startup the feasibility of the business idea must be assessed In
addition to specific factors that could make the project not feasible (eg legal considerations
standards) the assessment may include the time and resources needed to carry out the project
The construction of hotels on the moon may be technically feasible for example but their costbenefit
ratio is unreasonable
Interwoven with the feasibility criterion is profitability A company must be able to generate
longterm profit This fourth element of a successful business idea should thus indicate how
much money can be made and how
Traditionally profit calculations for a business are made as follows A company buys material
or services thereby incurring costs It also sells products or services to customers thereby
10
earning revenues If your business follows this pattern it is not necessary to provide any
greater detail in the description of your idea Do however make rough estimates of anticipated
expenses and profits One rule of thumb for growing companies is that the startup phase
should generate gross profits (revenues minus direct product costs) of 40 to 50
But many businesses do not function according to this traditional model McDonald＇s for
example earns its money from the licensing fees it charges franchisers The restaurant owner
pays McDonald＇s for the name and the way the restaurant is run If your business idea is based
on this kind of innovation in profit generation you should detail it in your business idea
KEY QUESTIONS Business idea
Who will buy your product
Why should customers buy the product What need does it fulfill
How will the product be distributed to the customer
What exactly is innovative about your business concept
How is the business concept unique Is it protected by patent
How is the product better than comparable alternatives
What competitive advantages will the new company have and why can’t a
competitor simply copy them
Can money be made with the product What costs will be incurred what
price will be asked
23 Protecting your business idea
Only a few ideas are genuinely ingenious True breakthroughs are the result of hard work and
therefore cannot be easily replicated A compromise must be found to protect the idea while
disclosing sufficient information to test its viability
Patenting
Early patenting is recommended especially in the case of new products or processes Get the
advice of experienced patent lawyers The future success of your business can depend on a
patent and in every industry there are powerful competitors with the means to keep an
unfavorable patent from being granted But some degree of caution is advised as a patent can
also miss the mark when it comes to protecting your idea by making the idea public Be sure to
keep in mind if the patent can be improved upon easily – and thus thwarted The recipe for
CocaCola for example is still secret and has never been patented because the patent can be
circumvented with a very few neutraltasting changes
Confidentiality agreement
11
Lawyers trustees and bank employees are all required by law to maintain confidentiality visàvis
their clients＇ businesses Venture capitalists also have an interest in keeping things under
wraps as someone with a reputation for poaching ideas will not be made privy to new ideas
any time again soon The same is true for professional consultants A confidentiality agreement
can be effective in some cases The coaches and organizers involved in EnterPrize are required
to sign a confidentiality agreement judges are encouraged to do so But like every legal
document it has its limits and there are gray areas that could make it difficult to prove a
violation of the agreement in court
Quick implementation
Your best protection against intellectual property theft is probably to implement your plan as
quickly as possible A great deal of work must be done between dreaming up an idea and
opening for business This effort can keep potential copycats at bay because in the end it＇s
crossing the finish line first that makes you the winner not having the fastest shoes
24 Presenting your idea to investors
How you present your business idea to an investor will put all your previous efforts to the test
It is critical to attract attention and pique interest through content and professional appearance
Good venture capitalists are presented with up to 40 business ideas per week and their time is
limited In submitting the business idea neither fanfare nor a wealth of details is as important
as a clear and thoughtful presentation
Example 1 The hard sell
I have a great idea for a new customerfriendly method of payment with a big future This is
something everybody has always wanted You could earn a lot of money from this … The
investor thinks That sounds like a lot of hot air I＇ve heard of a hundred such miracle solutions
before … Next
Example 2 The technical approach
I have an idea for a computerized machinery control system The key is the fullyintegrated
SSP chip with 12 GByte RAM and the asymmetrical XXPbased direct control unit It took me 5
years to develop this The investor thinks Techie In love with technology She＇s her own
market … Next
Example 3 The entrepreneur
I have an idea that will enable companies with up to 100 employees to save 3 to 5 of their
costs Initial costprice analyses have convinced me that a spread of 40 to 60 should be
possible I have found a focused advertising channel through the Association of Small and
Mediumsized Businesses and the ABC Magazine The product will be distributed by direct
sale The investor thinks Aha She has identified the customer value and even worked out
the figures She＇s thought about the market and the profit potential and knows how she will get
the product to her customers Now I＇d like to get a look at the product…
These examples demonstrate why clarity should be your foremost goal It is best to assume that
investors are not familiar with the technology of your product or the industry jargon They are
also not likely to take the time to look up an unknown term or idea Describing your concept
12
clearly and incisively is your next goal You must be able to convey the basic mechanics of your
business idea to an investor with credibility There will be plenty of time at a later point for
detailed descriptions and exhaustive financial calculations
Formal requirements of a business concept presentation
Title page
Name of the product or service
Name of the person(s) submitting
Confidentiality notice
Illustration where appropriate of the product or service in action
Body
4 to 7 pages (including a onepage executive summary)
Clear structure with headings and indentations as visual organizers
Charts illustrations tables
Maximum of 4 illustrations placed in the appendix
Use only if necessary for comprehension
Make reference to the illustrations in the text
Simple clear presentation
Uniform format
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13
3 THE BUSINESS PLAN
Writing a business plan forces you into disciplined thinking
if you do an intellectually honest job An idea may sound great but
when you put down all the details and numbers it may fall apart
Eugene Kleiner Venture Capitalist
The modest term business plan does not really do justice to this very important business tool
The business plan was first used in the US as means of acquiring funds from private investors
and venture capitalists who then participate in the company as coowners and provide the
capital The presentation of this type of startup strategy has become a mandatory courtesy
when seeking to do business with any partners including customers suppliers and distributors
to say nothing of venture capitalists and banks But business plans are not only used by startups
even major corporations rely increasingly on projectspecific business plans to help them
make internal investment decisions
31 Advantages of a business plan
The great importance attached to the business plan is well justified With it entrepreneurs can
prove that they are in a position to articulate and handle the diverse aspects of startups and
their management Properly conceived and executed the business plan becomes a key
document for evaluating and managing an operation
A business plan details the overall entrepreneurial concept behind a planned business It gives
an exact summary of the economic circumstances the targets set and the resources necessary
The business plan forces entrepreneurs to think through their ideas systematically It identifies
gaps in knowledge demands decisions and promotes the formulation of a wellstructured and
focused strategy During its preparation one after the other alternative approaches come to
light and are evaluated and pitfalls are identified With its clear analysis of the situation the
business plan becomes an invaluable tool for overcoming problems and contributes
substantially to boosting efficiency and effectiveness
32 Characteristics of a successful business plan
How a business plan is designed depends on what kind of venture is envisioned and what the
plan should accomplish If a plan is being written for a startup for example it will necessarily
have a different structure than one that aims to launch an existing company into a new segment
Despite such differences business plans have a number of things in common They are to
provide a clear and comprehensive evaluation of the opportunities and risks posed by the
operation This is no small task and completing it will require careful attention to certain
standards of design and content
The following suggestions and guidelines should help you make your plan successful
14
A good business plan impresses with its clarity
Readers should be able to find suitable answers to their questions It should be easy for readers
to find the topics in which they are particularly interested This means the business plan must
have a clear structure to enable readers to maneuver and choose what they would like to read
It is not the volume of analysis and data but rather the organization of the statements and a
concentration on the essential arguments that will persuade your readers Any topic that could
be of interest to the reader should therefore be discussed fully but concisely A total length of
about 30 pages give or take 5or so is generally appropriate
A business plan is not read in the presence of the author who could answer questions and
provide explanations For this reason the text must be unambiguous and speak for itself Each
plan should be presented to a test audience if at all possible before it is finally submitted
Competition coaches for example can help weed out confusing passages or indicate areas still
in need of editing
A good business plan convinces with its objectivity
Some people get carried away when they are describing what they feel is a good idea While
there is something to be said for enthusiasm you should try to keep your tone objective and
give the reader a chance to carefully weigh your arguments A plan written like glowing
advertising copy is more likely to irritate than appeal to your readers making them suspicious
skeptical or otherwise unreceptive
Equally dangerous is being too critical of your own project in response to various past
miscalculations or mistakes This approach will raise questions about your ability and
motivation To the best of your knowledge the data presented should be accurate Weaknesses
should never be mentioned without introducing methods to correct them or plans to do so
This does not mean that fundamental weaknesses should be hidden just that in preparing your
plan you should develop approaches to remedy them and present with clarity
A good business plan can be understood by the technical layman
Some entrepreneurs believe that they can impress their readers with profuse technical detail
elaborate blueprints and the small print of an analysis They are mistaken Only rarely are
technical experts called to evaluate this data carefully In most cases a simplified explanation
sketch or photograph is appreciated If technical details on the product or manufacturing
process must be included you should put them in the appendix
A good business plan is written in one consistent style
Several people usually work together to produce the business plan In the end this work must
be integrated to avoid creating a patchwork quilt of varying styles and analytical depth For
this reason it is best to have one person edit the final version
A good business plan is your calling card
Finally your business plan should have a uniform visual layout The fonts for example should
be consistent with the structure and contents effective graphics neatly integrated and perhaps
a header with the (future) company logo used
15
Exhibit 7
Seed
Before
startup
Mainly to
develop
business
concept
further
Growth
stage
At first or
second
growth spurt
IPO still far
off
To finance
growth
Early phase Growth phase
Exit
As a rule 58
years after startup
Recovery of
invested venture
capital for
reinvestment in
more startups
Transition to
established
company
VENTURE CAPITAL PARTICIPATION IN THE VARIOUS STARTUP PHASES
Startup
At or shortly
after startup
Eg for
product
development
initial
marketing
activities
Bridge stage
612 months
before IPO
To cover
financial
needs until
sale of stock
to public
When
What
for
33 The investor’s point of view
The entire startup process must focus on successful capital acquisition Professional investors
are the first real acid test of the chances your business concept will have Address your
communication entirely to them and learn to think like they do They will not be satisfied with
a mere description of your business concept even if it is brilliant
What is venture capital
Venture capital is the money that is made available by venture capital companies or individuals
to finance new businesses Typically such projects have a high chance of being profitable
while facing an equal risk of incurring loss Experience shows that of 10 businesses financed
with venture capital only one will triumph three will manage to eke out an existence three will
waste away and three will be a total loss It is only natural for venture capitalists to do
everything in their power to generate profits in line with the risk ventured Accordingly they
back up a project very intensely in order to harness as much potential as possible (Exhibit 7)
What do venture capitalists look for
Venture capitalists look for a number of important pieces of information in a business plan
Management experience and competence All investors pay particular
attention to who will be managing the enterprise When all is said and done
the ability of management to implement the concept is a major determinant
of whether a business survives or fails Particularly in industries where
innovation is critical the focus is on the proper mix of all necessary
management skills that one person alone will rarely have Entrepreneurial
16
experience is more highly valued than academic degrees Another test of a
worthwhile investment is the ability of management to work as a team
A welldefined and where possible quantifiable customer value In its
simplest form this means lowering the cost of delivering an existing value or
creating a new value if this can be achieved at reasonable cost
Innovative product or service range The product service andor business
system must possess a high degree of innovation
The possibility to protectsustain the innovation An important competitive
advantage to your company could be a patented idea
A growing andor large market Venture capitalists prefer startups that
demonstrate a potential to achieve significant sales of approximately 30
million within 5 years
An effective concept for capturing a clearly defined target customer
segment Potential investors want to see that you have a clear understanding
of your market and how you intend to reach your customers Your forecasts
and estimates should be based on wellfounded persuasive assumptions and
facts
A farsighted analysis of the competition Investors aren＇t naive – so don＇t
even try to claim that your product has no competition A complete and
objective description of existing and potential future competitors however
shows that you are aware of the risks you are taking which in turn will
inspire confidence in you Here again having an idea that can be protected
by law (patented trademarked) is an advantage
A careful weighing of the risks and opportunities Investors hate surprises
especially negative ones A realistic description of the risks you face and how
you plan to overcome them is far more credible than looking at the future
through rosecolored glasses
Detail possible exit routes Investors want to know from the outset when
their commitment will end and how they will recover their investment
Generating a profit is always the object and the purpose of investor
participation The more productive options you can show them for how to
do this the better The main possibilities include going public or selling
shares to the other partners or to other companies
What do venture capitalists do for the new company
Venture capitalists play a number of roles (see Exhibit 8) But they will also take over the reins
if the business does not achieve its targets How should you choose a venture capitalist
Venture capitalists generally expect to have a high stake in the new company In return they
provide support that goes far beyond a financial commitment and often shoulder a great deal of
17
23
POSSIBLE ROLES OF VENTURE CAPITAL COMPANIES
Coaches and
motivators of the
startup team
Advisors in
achieving success
(sale of the
company IPO)
Specialists in
forming new
companies
Gateways to a
network of
experienced
entrepreneurs
Possible roles of
venture
capitalists
Exhibit 8
responsibility for the success of the venture But potential investors do differ and the company
team should know its investors well If you would rather own 20 of a 100 million company
than 80 of a 5 million operation you will have to choose your investor according to more
criteria than just who will provide the most money at the best rate
34 Tips on preparing a professional business plan
Investors are interested in the finished plan not the process you went through to produce it
They prefer to see a wellprepared document from which they can gain a good sense of the risks
and opportunities involved on the first readthrough When preparing your plan the themes of
customer value and potential return should run through the descriptions of your business
objectives
The three phases of the competition provide a general structure for preparing your plan The
three phases build upon one another such that the contribution for a previous phase will
become a major portion of the following phase supplemented with additional elements How
you carry out the work within each phase is up to you The following tips are designed to help
you
Plan your approach
Drawing up a business plan is a very complex undertaking Many variables must be
considered and analyzed systematically in a logical order A detailed outline should be made
as soon as the first ideas are laid down It is smart to do your planning along the lines of a
business plan or according to your business system (eg R&D production marketing sales
delivery and administration) You should also number your topics and note any references
Using a word processing program with a spreadsheet is helpful All reference material should
be sorted by topic Do the same with notes from discussions
18
Tailor key questions to your specific project
Using a set of questions is helpful in preparing your business plan Which questions should be
asked and which answers included in the plan is determined by the type of value created the
product service or degree of technological sophistication and what the readers need to know
You can use the sample questions provided in this Guide to write your own series of questions
These questions are only examples designed to get you thinking they should not be taken as an
exhaustive list of possible questions
In other words you are neither required to answer each question nor must you reply to all
questions in equal depth It is up to you to decide which questions are relevant to your
undertaking and necessary to understand it You must also consider whether there are other
questions to be answered beyond those that have been provided
Focus on the final product
In projects of this kind there is always a danger of getting lost in the details of each analysis
Step back from time to time and ask yourself whether the data provided is not already sufficient
and whether further analysis will really be beneficial
We also recommend that you limit the length of the results for each of the three competition
phases You will save a lot of time and energy if you stick to the recommended lengths from
the beginning of your planning
Seek support early
Gathering support from many different parties will be important in this competition Teaming
up early is one such form of support Teams with complementary technical and entrepreneurial
experience can delegate assignments according to the talents of the individual team members
This will help ensure that the work will be performed efficiently
Do not hesitate to seek help from outside sources as soon as you need it Contact experts and
experienced entrepreneurs whom you meet at competition events or call the EnterPrize office
for assistance
Keep testing your plan
A winning entry will be easy to understand and follow Therefore it is important to present
your idea to a test audience along the way People outside the competition who critique your
plan before you submit it can identify weaknesses and even give your work fresh impetus
19
Exhibit 9
ELEMENTS OF A BUSINESS PLAN
Focus of this phase
Part of this phase
Phase 1 Phase 2 Phase 3
1 Executive summary
2 Product or service
3 Management team
4 Market and competition
5 Marketing and sales
6 Business system and organization
7 Implementation schedule
8 Opportunities and risks
9 Financial planning and financing
4 STRUCTURE AND KEY ELEMENTS OF A
BUSINESS PLAN
Despite their many differences all business plans have certain elements in common that all
potential investors expect to find (Exhibit 9) Additionally an appendix is often included that
contains detailed information often presented in the form of tables or graphs Within this more
or less required structure the business plan is free to grow in its own direction At the
beginning you will only work on a few key elements and individual topics New elements are
added with each additional phase while the topics from the previous phases are expanded and
gradually the plan fills with content At the end of the third phase the individual analyses
form a whole whose individual parts correspond to one another
41 Executive summary
A good executive summary gives me a sense of
why this is an interesting venture I look for a very
clear statement of the longterm mission an overview
of the people the technology and the fit to market
Ann Winblad Venture Capitalist
The executive summary is designed to pique the interest of decision makers It should contain a
brief overview of the most important aspects of the business plan In particular it should
highlight the product or service the value to the customer the relevant markets management
expertise financing requirements and possible return on investment
20
Venture capitalists look at the executive summary first though they usually just skim it The
quality of the summary itself is not likely to make them invest in your project yet it can
convince them not to A clear objective and concise description of your intended startup
which must be easy to comprehend especially by the technical layperson will show them that
you know your business Therefore prepare your summary with the utmost care it may well
decide whether the rest of your business plan is read
The executive summary is an independent element of the business plan Do not confuse it with
the introduction of your business concept on the title page Look at your executive summary
with a critical eye – repeatedly – especially after all other aspects of your business plan have
been completed Ask yourself if you have described your business idea as clearly compellingly
and concisely as you can
Your readers should be able to read and comprehend the summary in five to 10 minutes Test it
Give your executive summary to someone who has no previous knowledge of your business
concept or its technical or scientific basis
KEY QUESTIONS Executive summary
Phase 1
What is your business idea In what way does it fulfill the criterion of
uniqueness
Who are your target customers
What is the value for those customers
What market volume and growth rates do you forecast
What competitive environment do you face
What additional stages of development are needed
How much investment is necessary (estimated)
What longterm goals have you set
Phase 2
How high do you estimate your financing needs
What are the sales cost and profit situations
What are the most important milestones along the way to your goal
What test customers have you approachedcould you approach
What distribution channels will you use
What partnerships would you like to enter into
What opportunities and risks do you face
What is the picture on patents
Phase 3
Summarize the results of your detailed business planning and state your exact
financing needs
How will you delegate management tasks
How much production capacity is necessary
How will the implementation of your business idea be organized
List your next concrete steps
21
42 Product or service
If you don＇t know what the customer value is
the whole thing＇s a waste of time
Bruno Weiss Entrepreneur
Your business plan derives from an innovative product or service and its value to the end
consumer It is important to indicate how your product differs from those that are now or will
be on the market A short description of how far development has progressed and what still
needs to be done is also essential
Customer value
It doesn＇t make any sense to start up a new business unless the product or service is superior to
current market offerings Be sure to discuss in detail the function the product or service fulfills
and the value the customer will gain from it
If comparable products and services are already available from your competitors you must
convincingly substantiate the added value your customers will receive from your startup To
do so put yourself in the place of the customer and weigh the advantages and disadvantages of
your product over the others very carefully applying the same criteria to all
If you are offering a range of innovative products or services categorize them into logical
business areas according to product or customer Define the business areas in detail so there is
no overlap
Development status of the productservice
In explaining this issue imagine you are the venture capitalist who wants to minimize the risk
involved in participating Try to refrain from including technical details and describe
everything as simply as possible A finished prototype will show your potential investor that
you are up to meeting the technical challenge If it enhances the understanding of your product
include a photo or sketch in your business plan It is even better to have a pilot customer who
already uses your product or service
You should also explain the nature of the innovation itself and the edge you have over
competitors This is the point at which you should address the subject of patents for protection
from duplication or imitation or the protection of a model through registration If there are still
problems or issues to cover regarding development be sure to mention them and how you
intend to overcome these difficulties
Regulatory requirements on products and services pose another set of risks Note any permits
you have obtained have applied for or will apply for such as those of technical control
associations the postal service or the department of health
22
KEY QUESTIONS Product or service
Phase 1
What end customers will you address
What are the customer’s needs
What customer value does your productservice provide
What is the nature of your innovation What is the current status of technical
development
What partnerships are necessary to achieve full customer value
What competitor products already exist or are under development
Is your productservice permitted by law
What are the prerequisites for development and manufacturing
What stage of development has your product or service reached
Do you have patents or licenses
What further development steps do you plan to take What milestones must
be reached
Phase 2
What versions of your productsservices are designed for what customer
groups and applications
What patentslicenses do the competitors have
Do you need to obtain licenses and if so from whom and at what cost
What kind of servicemaintenance will you offer
What product or service guarantees will you grant
Compare the strengths and weaknesses of comparable productsservices
with yours in an overview
Phase 3
What resources (time personnel materials) do you require for each
subsequent development
What share of sales do you expect from your various productsservices (if
applicable) Why
What income from royaltiessales do you estimate from possibly marketing
the property rights Who would be your licenseesbuyers
43 Management team
I invest in people not ideas
Eugene Kleiner Venture Capitalist
The management section is often the first part of the plan that venture capitalists turn to after
reading the executive summary They want to know whether the management team is capable
of running a promising business Entrepreneurs frequently underestimate the significance of
this question and make the mistake of skimping on content and making do with meaningless
phrases
23
Take the time to describe your management team well When discussing management＇s
qualifications be sure to emphasize those that are particularly important for implementing your
specific plans Professional experience and past success carry more weight than academic
degrees If key positions are to be given to inexperienced staff members explain this decision in
detail
CHARACTERISTICS OF A POWERFUL MANAGEMENT TEAM
Common vision Everybody wants to succeed
Complementary attributes and strengths
At least three but usually no more than six people
Sticks together through thick and thin
Staying power even when there are setbacks regroups and makes a
second or even third attempt to clear the hurdle
Also explain how the responsibilities in the company are to be delegated and indicate which
positions still require reinforcements It is particularly helpful to compare the assignments to be
filled with the skill profiles of current team members Do not hesitate to name your most
influential advisors No one will have all the qualifications and experience necessary to found a
company Considerable involvement on the part of advisors such as experienced entrepreneurs
accountants PR firms or management consultants is a sign of professionalism and will reassure
the venture capitalist that you have all the contacts you may need
WHAT PROFESSIONAL INVESTORS LOOK FOR
Has the team already worked together
Do team members have relevant experience
Do the founders know their weaknesses and are they willing to make up for
them
Have the founders agreed on their future roles Are ownership issues settled
Has the management team agreed on a common goal or are there
underlying differences of opinion
Do the individual team members fully back the project
Finally although the management team will not be evaluated until the third phase of the
business plan competition it is advisable to begin looking for suitable partners as soon as
possible Bringing together just the right people to form a dream team so to speak is
immensely important for later business success and therefore requires a great deal of time and
care
24
KEY QUESTIONS Management team
Phase 3
Who are the members of your management team and what distinguishes
them education professional experience success standing in the business
world
What experience or abilities does the team possess that will be useful for
implementing your concept and setting up your company
What experience or abilities are lacking How will the gaps be closed By
whom
What goals do the team members pursue by starting up the business
How high is the motivation of each individual team member
44 Market and competition
If there is no competition
there is probably no market
Brian Wood
Thorough understanding of your customers and their needs is the foundation of every
successful business For it is the customers who give your company a reason for being And in
the end by buying – or not buying – your product or service they will decide if and how
successful your company will be Only those customers who are convinced they are getting a
greater value than they would from a competing product or by not buying a product at all will
buy your product Knowing your market and competition well is thus critical to the success of
your undertaking
Market size and growth
A dramatic increase in the value of the company can be expected only if the market holds great
potential The market size should be presented in figures representing the number of customers
unit sales and total dollars in sales Your expectations for market growth are critical You
should also indicate what main factors are now influencing or may influence the given industry
segment Show what factors will affect developments (technology legislative initiatives etc)
and what relevance these factors have for your business Work with a focus in order to save
yourself some energy Work with hypotheses make a list of questions you want answered
what information you will need and where you might find it
The external data necessary for an analysis are often easier to obtain than you might think Be
creative and determined make use of all possible sources including trade literature (journals
market studies scholarly essays) industry directories associations and government agencies
(statistics offices chambers of commerce patent offices) banks for industry surveys databases
the Internet (keep your searches focused) and of course interviews It often helps to call
around Using a short discussion outline will increase your efficiency and productivity as well
as the willingness of your party to disclose information
25
This collection of individual pieces of data seldom provides a direct answer to your questions –
you will have to draw wellfounded conclusions or make sound estimates When making an
estimate observe the following
Build on a solid foundation There may be many unknowns but if you rely
on easily verifiable figures your estimate will be harder to topple
Think logically An estimate should be a logical conclusion (ie it should
not have any leaps in logic or depend on unspecified assumptions)
Compare your sources Check your facts such as statements made in an
interview with a number of different sources if at all possible
Be creative The shortest distance to your goal is not always a straight line
For example when a variable is unknown look for a substitute variable that
relates to the one you need
Check for plausibility For each estimate ask yourself Does this result
really make sense
Market segmentation
Follow up your general explanations with your choice of target customer and your planned
market success (sales volumes sales revenues market share and profit) To do this you must
segment your market The choice of segmentation criteria is up to you as long as you are
certain that the number of customers in each segment as well as their behavior can be
determined and that the customers within each segment can be reached by means of the same
marketing strategy
Possible customer segmentation criteria for the consumer goods markets
Location country urbanrural (population density)
Demographics age sex income profession company size
Lifestyle techies counterculture active seniors
Behavior frequency of product use product application
Buying habits brand preferences price consciousness
Possible customer segmentation criteria for industrial goods markets
Demographics company size industry location
Operations technology employed (eg digital analog)
Buying habits centralized or decentralized purchasing purchasing criteria
supplier agreements
Situational factors urgency of need order size
26
Define the potential sales revenues for a given period per segment Take your sales strategy
and the behavior of the competition into consideration Depending on the industry you may
also want to allow for price erosion
Competition
Define the strengths and weaknesses of your competitors To do this evaluate your major
potential competitors using the same criteria such as sales volume and revenues (pricing)
growth market share cost positioning product lines customer support target groups and
distribution channels In the interest of brevity forgo the use of a great deal of detail Evaluate
your own company according to these same criteria and make a comparison as to how
sustainable your competitive advantage will be
Positioning visàvis the competition
Why should a potential customer buy your product and not that of your competitor Because it
offers greater value (in some aspect that is important to the customer) than competing products
because it is objectively or emotionally better or as marketing experts would say you have
developed a value proposition or unique selling proposition for your business idea
Formulating this value proposition and anchoring it firmly in the mind of the customer is the
main task of marketing communication Marketing experts talk about the positioning of a
product brand or business Wellpositioned products leave consumers with a particular
impression The most important guideline for positioning is therefore to look at the product
from the customer＇s point of view The point is to meet a need better not to present new
product attributes The advantage to the customer must be immediately clear memorable and
important At the same time your positioning must be distinctive from that of competitors
Only then can customers connect the value proposition that you offer with the name of your
product or business and buy your product The following guidelines may help
Identify relevant customer needs or problems
Define clear customer segments of sufficient size
Design an attractive range of products and services
Make yourself unique through differentiation from the competition
Address the subjective perception of the customer
Ensure customer satisfaction even after purchase
Because positioning is so critical to the market success and therefore to the longterm success
of your business you should pay particular attention to it Persuasive positioning will not come
about immediately it will be a result of intense effort and will need frequent revision to achieve
the maximum effect The point of departure for positioning is the product itself Additional
insight will be found as you refine and modify your product during development and respond
to new revelations as a result of customer surveys
27
KEY QUESTIONS Market and competition
Phase 1
How is the industry developing
What factors are decisive for success in your industry
What role do innovation and technological advances play
How will you segment the market
What market volumes do the individual market segments have now and in
the future (rough estimates)
Who are your target customer groups
What customer examples can you give
What major competitors offer similar productsservices
What new developments can be expected from competitors
How sustainable will your competitive edge be
Phase 2
What market volume (value and amount) do you estimate for your individual
market segments over the next 5 years
What will influence growth in the market segments
What is your estimate of current and future profitability of the individual
market segments
What market shares do you hold in each market segment
What segments are you targeting
Who are your reference customers How do you plan to get reference
customers
What role do service consulting maintenance and retail sales play
How much do you depend on large customers
What are the key buying factors for customers
How does the competition operate What strategies are pursued
What are the barriers to market entry and how can they be overcome
What market share does your competition have in the various market
segments
What target groups do your competitors address
How profitable are your competitors
What are your competitors marketing strategies
What distribution channels do your competitors use
How sustainable will your competitive edge be Why
How will competitors react to your market launch How will you respond to
this reaction
Compare the strengths and weaknesses of your major competitors with your
own in the form of an overview
45 Marketing and sales
Marketing is far too important
to be left to the marketing department
David Packard Entrepreneur
28
Key elements of a wellconceived business concept are wellplanned marketing and sales
activities They require a persuasive description of your strategies for market launch marketing
and the measures planned for sales promotion A skeleton framework to follow is that of the
four Ps product price place and promotion
1 Product
Your original product idea has already given you some sense of the characteristics of your
product After a closer analysis of the needs of various customer segments you now must
evaluate whether your product actually meets them or to what extent it may require adaptation
This raises the question of whether you should manufacture one single product for all segments
or whether you want to adjust the product to meet the needs of individual segments
2 Price
The basis for an attainable price is the willingness of customers to pay the price asked of them
This contradicts the conventional wisdom that price is derived from costs Of course cost is a
considerable factor but the costprice ratio only becomes critical when the price asked will not
cover costs within the foreseeable future In this case it is advisable to get out of the business as
quickly as possible or better yet never to go into the business in the first place
The price you can ask depends entirely on how much the value of your product is worth to the
customer You have defined and perhaps quantified the customer value in the business
concept or product description Now define a price bracket based on the quantified customer
value of your product You can verify and refine your assumptions through discussions with
potential customers
The pricing strategy you choose depends on your goal Do you want to penetrate the market
quickly by going with a low price (penetration strategy) Or do you want to generate the
highest possible return from the outset (skimming strategy)
New companies generally pursue the skimming strategy for good reason
A new product is positioned as better than previous options so a higher
price can be justified
Higher prices generally lead to higher profit margins and allow the new
company to finance its own growth New investments can be financed out of
profits and outside investors are no longer needed
Unlike the skimming strategy the penetration strategy generally requires
high initial investment in order for supply to meet the high demand This
heightened investment risk is something investors usually prefer to avoid
Certain situations make following a penetration strategy the better choice
Setting a new standard Netscape distributed its Internet browser free of
charge thus setting a standard With the Macintosh however Apple
29
followed a skimming strategy and missed the chance to establish the Mac as
the new standard
High fixed costs Businesses with high fixed costs are forced to find a wide
audience as quickly as possible to make those costs worthwhile Fixed costs
at Federal Express for example for air transport and sorting facilities are the
same whether they deliver thousands or many millions of letters
Competition If the entry barriers are low and tough competition is likely a
penetration strategy is the best way to be faster than the competition in
capturing a large market share Such cases naturally also raise the question
as to whether this type of business is appropriate for a startup
3 Place
Your product or service will somehow have to reach the customer physically Although this
may sound simple it involves another monumental marketing decision In what way via which
distribution channel do you want to deliver your product
The choice of distribution channel is influenced by various factors such as how many potential
customers will you have Are they companies or individuals How do they prefer to shop
Does the product require explanation Is it in an upper or lower price bracket Basically you
will have to consider whether your company will handle distribution itself or whether a
specialized operation will handle it for you This sort of makeorbuy decision will have a
significant impact on both the organization and the business system of your enterprise The
choice of distribution channel is thus closely related to other marketing decisions and will in
turn affect other measures
Distribution can be roughly categorized into two forms direct or multichannel Technological
developments particularly in information technology have greatly expanded the spectrum of
distribution channels over the past few years Here is a selection
Thirdparty retailers Products are sold via retailers who have easy access to
potential customers Here it is important to acquire a good shelf position
which is obviously also sought by the competition and is accordingly
expensive The product must also offer retailers an attractive profit if they
are to include it in their range at all
Outside agents Specialized companies act as agents for the distribution of
products from various manufacturers They take over the function of the inhouse
sales person Outside agents are relatively expensive although only
for the sales they conclude successfully They make no commission if they do
not sell the product making them an attractive channel for new companies
since risk is limited Good agents however are not always easy to find
Franchising A business concept is put into practice independently by a
franchisee who pays a licensing fee whereby the franchiser maintains control
of the business policies (McDonald＇s is an example) Franchising enables
30
rapid geographic growth while ensuring control of the sales concept without
huge personal investment
Wholesalers It can be difficult for a small company to maintain contact with
a large number of retailers A wholesaler who has good contacts to the retail
trade can take over this activity helping to improve market penetration while
lowering distribution costs On the other hand wholesalers often demand a
cut for their efforts
Stores Selling in your own store is a good choice when the design of the
purchasing experience is central to the product and only a small number of
stores is necessary to cover the market Independent shops will require
investment but will also allow the greatest control over distribution
Own sales staff Sales agents are above all deployed when the product is
complex (eg capital goods) requiring extensive knowledge of the product
Facetoface customer visits are expensive the number of customers must be
fairly small Having your own sales staff as the distribution channel is
relatively expensive and only worthwhile for involved products
Direct mail Select customers receive a mailing through the postal service
Addresses can be purchased from database companies and sorted according
to desired criteria The success of the direct mailing depends on whether the
reader feels an immediate appeal – otherwise it lands in the wastebasket
Call center Through advertising customers are invited to order a product
by telephone Simple products can be distributed to many customers in this
way with no need to set up stores throughout the entire sales region You
can also hire the services of specialized call center operators
Internet The Internet is a relatively new marketing channel through which
a global market can be reached at minimal cost
4 Promotion
Before potential customers can appreciate your product they have to hear about it And to
achieve this you must advertise to attract attention inform persuade and inspire confidence
Those are the objectives of communication Communication must explain the value of your
product or service to your customers as well as convince customers that your product meets
their needs better than competing or alternative solutions There are various ways of getting
the customer＇s attention
Classic advertising newspapers magazines trade journals radio TV movie
theaters
Direct marketing direct mail to select customers telephone marketing
Internet
Public relations articles in print media about your product business or you
written by you or a journalist
31
Exhibitions trade fairs
Customer visits
Communication is expensive so make the most of it Calculate exactly how much advertising
you can afford per sale and choose your communication messages and media accordingly
Focused communication yields the best results When you address your customers focus on
the people who make the purchasing decision or have the greatest influence on the purchasing
decision
KEY QUESTIONS Marketing and sales
Phase 1
What final sale price do you want to charge (estimated) What criteria did
you use to arrive at this final sale price How high is the profit margin
(estimated)
What sales volumes and sales revenues are you aiming for (estimated)
Phase 2
In which partial market segments will you make your market entry How do
you plan to turn this toehold into a highvolume business
What sales volumes are you targeting (detailed data by market segment)
Describe the typical process of selling your productservice Who among
your buyers ultimately makes the purchasing decision
What target groups will you reach by what means of distribution
Do you want to penetrate the market quickly with a low price or bring in the
highest return from the start Explain your decision
How will you draw the attention of your target groups to your product or
service
How will you woo reference customers
How much in time and resources will it cost to acquire a customer
What advertising materials will you use to do so
What part do service maintenance and hotlines play
How difficult will it be andor what will it cost to create longlasting customer
loyalty
What other planning steps are necessary in the runup to launching your
productservice Draw up a schedule with the most important milestones
Phase 3
What demands (employee number qualifications and outfitting) must the
operation meet in order to effectively implement its marketing strategy What
is your estimated expenditure for this area
How will sales volume and operating results be spread out among the various
distribution channels (estimated)
Which market share per distribution channel do you plan to capture
What are your expenses At launch – and later
What price will you charge for your productservice per target group and
distribution channel
What payment policies will you lay down
32
Exhibit 10
Research and
development
Production Marketing Sales Service
GENERIC BUSINESS SYSTEM
46 Business system and organization
Organizations exist to enable ordinary
people to do extraordinary things
Ted Levitt Editor Harvard Business Review
Business system
Every entrepreneurial assignment is comprised of the interplay of a number of individual
activities When they are presented systematically in relation to one another a business system
results The business system model maps out the activities necessary to prepare and deliver a
final product to a customer For clarity＇s sake they are grouped into functional blocks
Devising a business system is a good way to understand the business activities of a company
think them through systematically and display them with transparency A generic business
system common to nearly all industries and enterprises is shown in Exhibit 10
Use the above model as the starting point for designing your own business system You will
need to adapt it to your own situation and make it concrete in order to put it into practice For a
manufacturer for example it may be useful to subdivide the production category into separate
stages such as purchasing raw materials processing component manufacture and assembly
You may also need to separate sales into logistics wholesale distribution and retail sales for
example
An individual plan will be appropriate to each case depending on the industry in which you
operate and of course the business itself The business system of a computer manufacturer
will be very different from that of a fast food chain And the business system of a department
store may look quite different from that of a direct merchandising company although both will
sell many of the same products There are no general rules or standards for a business system
Your own system should be logical complete and useful for planning – just don＇t let it get too
complicated
Concentrate on the major activities in your business system A team of three to five will not be
able to cover all tasks themselves either because they do not have the abilities or because they
could not do so with the necessary efficiency Together with your management team think
carefully about what activities really create something new and how you and your staff can best
make use of your time to create the highest value for your customer and get ahead of the
competition The buzzword here is focus Once you have determined which activities make up
33
Exhibit 11
SAMPLE STARTUP ORGANIZATION
Managing Director
Mr Dux
Research and
Development
Mr Invent
Production
Mr Facit
Marketing
Ms Oratoria
Finance
Mr Pecunia
Human
Resources and
Administration
Mr Dux
your business system choose those which you can execute better than anyone else A trend
toward specialization can be observed in many industries
Specialization is particularly important for startups They should concentrate all their energy
on just a few select activities in the business system At the beginning even software giant
Microsoft concentrated solely on the development of the DOS leaving all other activities in the
business system up to IBM
Organization
In addition to a business system you will need to consider several other organizational issues
It is essential that tasks and responsibilities be clearly delegated and that you design a simple
organization with few levels The rest will follow as needed during operation Your
organization must be flexible and always adaptable to new circumstances Be prepared to
reorganize your company repeatedly during the first few years Decide who is responsible for
what in each business area (delegation of tasks and responsibilities) As soon as you have set
up the interdisciplinary functions such as a management human resources finance and
administration you＇ll be up and running If you keep your organization simple each staff
member will know which assignments he or she must complete and can carry them out
independently On the other hand everyone should be in a position to fill in for another team
member for a short time if necessary (See Exhibit 11)
Business location
Describe briefly the choice of location for your business Do not enter into a longterm rental
agreement as your business may have to move in response to the growth you anticipate You
may have to make this move fairly quickly
Make or buy and partnership decisions
Once you have determined the core of your business and have drawn up the necessary business
system you will have to think about who will best carry out the individual activities Activities
outside your chosen focus should be handled by third parties But supporting activities within
the new company do not necessarily have to be carried out by you These may include
34
bookkeeping or human resources For each activity the question to ask is Do we do it
ourselves or have someone else do it to make or to buy
Makeorbuy decisions need to be conscious decisions taken after weighing the advantages and
disadvantages Supplier partnerships for example cannot be dissolved from one day to the
next and some partners cannot easily be replaced if for some reason they are no longer
available When considering makeorbuy decisions rely on the following criteria
Strategic significance Those aspects of performance that make a major
contribution to your competitive advantage are of strategic importance to
your business They must remain under your control A technology
company could hardly relinquish research and development and a consumer
goods manufacturer would never give away its marketing activities
Suitability Every business activity demands specific abilities that may not
be available within the management team Your team must therefore
consider whether in specific instances it is best to carry out a particular task
acquiring the necessary abilities or whether it would be better to hand over
the task to a specialized company Specialists may not only be able to carry
out the assignment better they may also be able to offer a cost advantage
thanks to higher production volumes
Availability Before you make a decision to buy you need to find out
whether the product or service is available in the form or with the
specifications you require Negotiate whenever possible with several
suppliers You will usually find the best terms in this way and will learn
more about the service you are buying Often you can help a supplier
improve its performance If you cannot find someone to supply what you
need you may find a business partner who is willing to acquire the necessary
skills to do so
The question for a startup is how you want to cooperate with other companies Every
partnership has its advantages and disadvantages
Informal nonbinding partnerships represent no great obligation for either
side Both parties can end the partnership quickly and easily But they must
also live with the knowledge that supply or demand could dry up just as
quickly Furthermore suppliers will not be able to meet all the special needs
of a customer since they can not sell tailored products to all their customers
Casual partnerships are typical for mass products everyday services and
standardized components for which replacement buyers and sellers are easily
found
Close partnerships are sometimes characterized by a high degree of
interdependence They are typical of highly specialized products and
services or high trade volumes In these situations it is usually difficult for
both sides to change partners or to buy or sell large quantities of special parts
35
within a short time period The advantage for both sides is the security of a
binding relationship and the possibility of concentrating on one＇s own
strengths while benefiting from the strengths of partners
In order for a partnership to develop into a successful business relationship a number of factors
must be considered
Winwin situation Both sides must be able to gain a fair advantage from the
relationship Without an incentive for both sides a partnership cannot be
sustained
Risks and investments Partnerships involve risks that are usually brushed
aside when business is going well A supplier with an exclusivity agreement
can for example end up in a difficult situation if the buyer suddenly cuts
back production and purchases fewer components This is especially true if
the supplier has acquired specialized production tooling that cannot
immediately be used for other orders and buyers Conversely a buyer can
face difficulties if a major supplier ceases to deliver (bankruptcy fire strike
etc) Such risks and possible financial consequences must be thought
through from the outset and perhaps regulated by contract
Dissolution As in interpersonal relationships business relations can also
suffer tension and result in irreconcilable differences Make sure to lay down
in detail under which conditions a partner can withdraw from a partnership
When working on your business plan it is not too early to begin thinking about whom you may
want to cooperate with and what form this may take Partnerships will allow a young company
to benefit from the strengths of established companies and focus on developing their own
strengths Through partnerships you can usually grow faster than you could on your own
KEY QUESTIONS Business system and organization
Phase 2
What does the business system for your productservice look like
What activities do you want to handle yourself
Where will the focus of your own activities lie
What business functions make up your organization and how is it structured
What resources do you need (quantitative and qualitative) to create your
productservice
How high is your need for technical input (raw materials materials to create
your service)
What will you make what will you buy
Which partners will you work with What are the advantages of working
together for you and your partners
Phase 3
Where will you locate your business
36
What capacity for product manufacture and service production do you plan
(number of units)
How much will production and delivery of your productservice cost
How and at what cost can you adjust your capacity in the short term
What measures are planned for quality assurance
If you need a warehouse how will you organize your inventory
How much of your product has to be put in storage
How are your costs structured (fixed variable)
47 Implementation schedule
Business is like chess To be successful
you must anticipate several moves in advance
William A Sahlmann Professor
Investors want to know how you envision the development of your business A realistic 5year
plan will inspire credibility among investors and business partners Moreover it will help you
think through your various activities and interdependencies You will endanger your business
if you attempt to reach your targets with faulty and above all overly optimistic planning
Drawing up your implementation schedule
Concentrate on the most major milestones and the most important interdependent events The
following three elements will usually suffice
Gantt implementation schedule (for a sample Gantt timeline see CityScape
case study)
Major milestones
Important connections and interdependencies between the work assignment
groupings
Human resources planning
As your new business takes off systematic personnel planning will become more and more
indispensable Growth will require you to recruit new employees who will have to be trained
and integrated into the business Maintaining a simply structured working environment will
help you draw up clear job descriptions and seek just the right employees Keep in mind that a
qualified specialized workforce may be difficult to find even in times of high unemployment
You will often not be able to avoid stealing good employees from competitors
Include costs in your personnel planning in order to arrive at the total cost of human resources
(wages and indirect labor costs) for the income statement in your business plan The cost of
personnel depends on a number of factors such as the industry itself employee qualifications
and age Additionally indirect labor costs can amount to over 50 of the wage
37
Investment and depreciation planning
Investment and depreciation planning includes all investments that may be capitalized and the
corresponding writeoffs The amount of depreciation depends on the service life planned for
the property Usually property is written off in full over 4 to 10 years in equal annual amounts
(straightline method) Investments are to be included in the liquidity calculation and the total
amount of annual writeoffs listed in the planned income statement
KEY QUESTIONS Implementation schedule
Phase 3
What are the most important milestones for the development of your business
and when must they be reached
How do you plan to structure the work to reach these targets
Which tasks and milestones are interdependent
For which tasksmilestones do you anticipate bottlenecks
How many new employees will you need in the individual business areas
over the next 5 years What will this cost
How much real capital is necessary to achieve initial sales
List your planned shortterm investments
List your planned longerterm (3 to 5 years) investments
What investments will be required when which milestones are reached
How high is the annual depreciation for each investment
38
48 Opportunities and risks
One of the greatest myths about entrepreneurs is that
they are all risk seekers All sane people want to avoid risk
William A Sahlmann Professor
The object of this exercise is to identify a margin of error for departures from your assumptions
If possible with reasonable effort it is advisable to draw up bestcase and worstcase scenarios
involving key parameters to identify the opportunities and risks These calculations will allow
venture capitalists to judge how realistic your plans are and to better assess the risk of their
investment
Change various parameters in the scenarios (such as price or sales volumes) to simulate how a
change in conditions might affect your key figures (sensitivity analysis)
KEY QUESTIONS Opportunities and risks
Phase 2
What basic risks (market competition technology) does your business venture
face
What measures will you take to counter these risks
What extraordinary opportunitiesbusiness possibilities do you see for your
company
How could an expansion of your capital base help
Phase 3
What will your planning look like for the next 5 financial years under both a best
and worst case scenario
What effect will this have on your need for capital and your return
In your view how realistic are these scenarios
What consequences do they have on your business planning
49 Financial planning and financing
Planning substitutes
chaos for mistakes
Unknown
Financial planning assists you in evaluating whether your business concept will be profitable
and can be financed To this end the results of all preceding chapters must be compiled and
consolidated Projected growth in value results from the planned cash flows from your
operative business These are revealed through liquidity planning which also provides
39
information on your various financing needs In addition the profit situation of your business
can be seen in the income statement This statement is also necessary according to commercial
and tax law There are many ways to present the figures The appendix contains sample tables
of how to perform liquidity planning and make up an income statement as well as a balance
sheet
Minimum required of financial planning in your business plan
A cash flow calculation (liquidity planning) income statement balance sheet
Forecasts over 3 to 5 years at least 1 year beyond the point of breaking even
that is beyond the generation of positive cash flow
Detailed financial planning for the first 2 years (monthly or quarterly)
thereafter annually
All figures must be based on reasonable assumptions (only the main
assumptions need to be described in the plan)
Planned income statement
Whether a company＇s assets grow or diminish depends on the bottom line at the end of a year
The income statement can help you forecast this In contrast to liquidity planning ( planned
cash flow) an income statement focuses on the issue of whether transactions lead to an increase
( revenue) or a decrease ( expense) in the net worth of your business (defined as the sum of
all assets minus debt)
Go through your entire business plan and decide whether your assumptions will lead to
revenues or expenses and if so how high they will be If you are in doubt about the exact
amount of costs your business will incur gather quotes and estimates Do not forget to cover
the cost of your personal living expenses In the case of a limited liability company this would
be the salary of your general manager
List writeoffs in your investment and depreciation planning The cost of investments
themselves (ie the purchase price of the investment) is not included in the income statement
because the amount paid out does not lead to a change in the net worth of the business
Material costs comprise all expenses for raw materials auxiliaries expendable supplies and
purchased goods and services Your planned human resources expenditure includes wages and
salaries plus social security contributions and taxes and is listed under personnel costs For the
purpose of simplification the category other costs is treated as a collective item including
among other things rent insurance office supplies postage advertising and legal counsel
When assigning individual revenues and expenses strictly observe legal regulations Finally
calculate the difference between all revenue and expenses in a financial year by which you will
arrive at an annual net profitloss This will give you an overview of the operating result but it
will not give you a reliable assessment of your level of liquid funds For this you will need
liquidity planning
40
Sales of your product or service may be booked in the current financial year even though
payment does not occur until the next you will need to list the sales revenue even though the
money has not yet been deposited into your accounts The same is true for expenses The
income statement is generally planned in annual intervals To enhance the accuracy of your
planning for the first year you should make monthly forecasts and quarterly forecasts for the
second year For the third fourth and fifth years continue to make annual projections You
can make use of the tables contained in the appendix of this Guide to list the figures
Liquidity planning
Your company must have a certain amount of cash on hand at any given time in order to avoid
becoming insolvent which leads to bankruptcy that will mean the financial ruin of your
business Detailed liquidity planning should help ensure a positive cash flow The principle is
simple Receipts are compared directly to disbursements Please note that writing or receiving
an invoice does not mean that the money is already in your account or that you have paid the
bill Liquidity planning is concerned with the date of payment when the money actually comes
in or goes out Thus liquidity planning involves only those transactions that cause a change in
your cash reserves Depreciation liabilities and nonmarket output are not included
Lay out the amount and timing of all the payments you expect Your company is solvent when
the sum of its receipts is greater than the sum of its disbursements at any given time You will
have to draw on capital for those times when this planning does not cover all expenses The
sum of all these individual payments will equal the total capital required for that planning
interval
The farther you look into the future the more uncertain your planning will be Liquidity
planning should thus be carried out every month for the first year quarterly for the second year
and only annually for the third fourth and fifth years The appendix of this Guide contains
tables you can use for an exact compilation of the figures
Projected balance sheet
Venture capitalists are interested in seeing how your assets are expected to grow as represented
on a projected balance sheet Here the type and value of the assets are placed on the asset side
of the balance sheet across from the source of the capital on the liabilities side As with the
income statement there is a standard accounting format required by law for balance sheets
They are prepared at annual intervals Again the appendix of this Guide contains tables you
can use for an exact compilation of the figures
Financing needs
Liquidity planning enables you to determine the amount of capital you will need and when you
will need it but it does not indicate how these needs will be met We basically distinguish
between equity (investors have a stake in the business) and loan capital (which is borrowed
from outside sources) Select the right mix for your business from the myriad sources of
financing available to you (Exhibit 12)
You can＇t get something for nothing the saying goes and the same is true of money Your
family may ask little in return for financial assistance professional lenders are more demanding
41
Exhibit 12
SOURCES OF CAPITAL AT VARIOUS STAGES OF DEVELOPMENT
Seed phase Startup Growth Establishment
Personal savings
Family loans
Government grants
Individuals
(usiness angels
Venture capital
Mortgages
Leases
Bank loans
Stock exchange
All the management team can offer investors for their cash is a promise – not exactly a good
position from which to negotiate Nevertheless you have a good chance of being
financially successful if business goes well because professional investors also have an interest
in top performance from the team Be clear about your needs and expectations and those of
your investors
If you are seeking a longterm commitment and are satisfied with a small company you are
probably well advised to make use of family funds and loans from friends and banks You will
retain a majority shareholding but you are significantly restricting your chances for growth
If however you desire rapid expansion you will want to procure venture capital Venture
capitalists will generally expect to obtain a large share of the company You may in fact have
to relinquish the majority of the equity Professional investors however are not interested in
managing the business as long as you meet your targets even if they have the majority
shareholding They have after all invested in the management team in order to lead it to
success They will support you actively with their management skills and contribute specialty
knowledge such as legal or marketing expertise ties and contacts
A deal can be very complicated It is always advisable to contact experienced entrepreneurs
and get the expert advice of trustees tax advisors and lawyers You may also want to gather a
number of bids from various investors Do not be put off by complicated arrangements There
are usually legitimate reasons for them such as tax breaks control of the funds invested etc Be
absolutely certain however that you understand all the details of the deal
Calculating the investor＇s return
42
Exhibit 13
090 053
106
Year 0
CALCULATING THE RETURN
Millions
Year 1 Year 2
Year 3 Year 4 Year 5
0 0
2500
Series of cash flows
Discount factor
Discounted value of
cash flows at IRR of
72
100
090
058
062
034
018
020
0
011
0
007
170 Total 0
106
Investors evaluate the success of an investment by the return they get on the capital invested
As a result anticipated return should be apparent at a glance in the business plan
In the CityScape case study for example investors put a total of 25 million into the enterprise
during its first 3 years (09 11 and 05 million respectively) After 5 years and listing on
the stock exchange realistic proceeds of approximately 25 million are expected How high is
the return in this case (Exhibit 13)
From the point of view of the investor all funds contributed to a new company result first in
negative cash flows After a business breaks even positive cash flows will not immediately be
paid out in the shape of dividends but will be first used to strengthen the balance sheet Cash
will be returned to the investors at realization Because cash flows will occur over several years
they must be discounted that is calculated back to the present (interest and compound interest
calculation) The discount factors for the various years can be arrived at using the following
formula
discount factor 1
(1+r)T
whereby r the discount rate in percent and T the year in which the cash flow takes place To
calculate the return the internal rate of return (IRR) method is used The IRR is the discount
rate at which the sum of all positive and negative cash flows discounted at present results in
zero The IRR for the CityScape project example is 72 That means that the investors get an
annual return of 72 on their capital This is a reasonable return considering the risk involved
Most calculators and spreadsheets have a special IRR function with which to calculate the IRR
(in Excel this is the IRR () function) It can also be calculated by hand
43
Valuation of a company (ie working out how much a market is prepared to pay for shares
when a business goes public) is an art in itself A simple rule of thumb is that the value is six to
eight times the cash flow or net profit (after taxes) of the business in the year of initial public
offering In the case of CityScape a factor of six multiplied by the net profit in the fifth year
(42 million) was used which results in a valuation of 252 million
If you have no experience in financial planning consulting with coaches or experts (eg tax
consultants or accountants) is highly recommended In particular discuss the issues of turnover
sales and income taxes which have been simplified here with a tax advisor at one of the
competition events listed at the front of this Guide Note that most business ventures fail due to
lack of financial planning If you don＇t have someone with the necessary skills on your team
already start looking
KEY QUESTIONS Financial planning and financing
Phase 3
How will your revenues expenses and income develop
How will your cash flow develop When will you expect to break even ( sum
of all revenues greater than the sum of all expenses)
How high is your need for financing based on your liquidity planning
How much cash is needed in the worst case scenario
What assumptions underlie your financial planning
Which sources of capital are available to you to cover your financing needs
What deal are you offering potential investors
What return can investors expect
How will they realize a profit (exit options)
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Table of Contents
1 The Route from Concept to Company 2
11 Success factors 2
12 Stages of development 3
2 The Business Idea6
21 Developing a business idea 6
22 Elements of a promising business idea7
23 Protecting your business idea 10
24 Presenting your idea to investors11
3 The Business Plan13
31 Advantages of a business plan13
32 Characteristics of a successful business plan13
33 The investor’s point of view15
34 Tips on preparing a professional business plan17
4 Structure and Key Elements of a Business Plan19
41 Executive summary19
42 Product or service 21
43 Management team22
44 Market and competition 24
45 Marketing and sales27
46 Business system and organization 32
47 Implementation schedule 36
48 Opportunities and risks 38
49 Financial planning and financing38
2
Exhibit 2
KEY FACTORS FOR SUCCESS OF INNOVATIVE STARTUPS
Ideas
Degree of
innovation
Scope
Patent
Capital
Availabilityamount
Needs
responsibilities
Exits for investors
People
Inventors
Entrepreneurs
Team
members
Traditional service
providers
Attorneys
Patent lawyers
Tax consultants
accountants
Market
researchers
Network and exchange
Coaching
Networking
Team building
Innovative service provider
–Venture capitalists
–Headhunters
–Angel investors
–Hightech startup
consultants
1 THE ROUTE FROM CONCEPT TO
COMPANY
New innovative companies generally try to grow from startups into established companies
within 5 years But they can seldom finance their activities alone along the way Rather they
are dependent on professional investors with considerable financial clout For entrepreneurs
financing is a critical question – the business plan must thus be considered from the point of
view of potential investors right from the outset
11 Success factors
Successful companies arise from a combination of five elements (Exhibit 2)
1 No business concept no business
Having an idea is just the beginning of the creative process Many entrepreneurs are initially
infatuated with their inspiration losing sight of the fact that their idea is the point of departure
for a long process of development which must face – and withstand – tough challenges before it
can enjoy financing and market success as a mature business concept
2 Money matters
Without somebody who invests money into the idea to grow it into a viable business this
business will never become a reality From early on therefore much attention must be paid to
convincing investors to provide the necessary funding
3
Exhibit 3
STAGES OF STARTUP DEVELOPMENT
Business idea
generation
Business plan
preparation
Startup
and growth
Established
company
Interest of
investors
Financing
decisions
Exit of
initial
investors
3 No entrepreneurs no enterprise
Growing new firms is not a oneperson job It can only succeed with a team of usually three to
five entrepreneurs whose talents are complementary Putting together wellfunctioning teams
is a difficult process – one that takes time energy and an understanding of human nature Do
not lose any time in putting your team together and work on perfecting it throughout the entire
startup process The characteristics of a highperformance management team are discussed in
more detail in section 63 of this Guide
4 Traditional service providers will help you clear the first hurdles
You will often need the advice of professional service providers such as patent lawyers tax
advisors and market researchers especially at the beginning Getting the right information
early (eg for registering a patent) can have consequences for later success or failure
5 Strong networks are a shot in the arm for every new company
Professional guidance for potential entrepreneurs through a network of sponsors entrepreneurs
venture capitalists and service providers is decisive in transforming viable ideas into real
companies Prime examples for such regional networks can be found in Silicon Valley and the
Boston area
12 Stages of development
The typical progression of the startup and development of growing companies into established
firms can be subdivided into three stages The end of each stage serves as a milestone for
venture capitalists by which to gauge the status of their investment Being familiar with each
stage and the challenges it poses may spare you wasted energy and disappointment Please
note however that the three stages in the development of a functioning startup do not match
the three phases in the development of a business plan within the framework of this
competition (see Exhibit 3)
If you intend to be successful this startup process should influence both your activities as the
initiator of a business concept and your path toward forming your own company To a large
extent it is the demands of investors that will determine how you must approach the individual
stages of the startup
4
Stage 1 Business idea generation
The beginning is the inspiration – your solution to a problem It must be evaluated to
determine if it delivers an actual customer value whether the market is big enough and just
how big it will be The idea itself has no intrinsic economic value It acquires economic value
only after it has been successfully transformed into a concept with a plan and implemented
You will need to start putting together your team as soon as possible finding partners who can
develop your product or service until it is ready for market (or at least until shortly before) In
the case of products this stage usually involves a functioning prototype You will most likely
have to do without venture capital during this stage You will still be financing your plan with
your own money help from friends perhaps state research subsidies contributions from
foundations or other grants Investors refer to this as seed money as your idea is still a
seedling not yet exposed to the harsh climate of competition
Your objective at this stage is to present your business concept and market – which forms the
foundation of your new company – so clearly and concisely as to pique the interest of potential
investors in helping you cultivate your idea further
Stage 2 Business plan preparation
At this stage it is most important to focus on the big picture Don＇t lose sight of the forest for the
trees The business plan itself will help you to focus as you must consider and weigh the risks
involved prepare for any contingency and learn to anticipate a variety of possible situations or
scenarios You will need to lay down plans and create a budget for the key activities of the
business – for development production marketing distribution and finance Naturally you
will need to make many decisions such as which customers or segments will you target What
price will you ask for your product or service What is the best location for your business Will
you handle production yourself or outsource it to third parties And so on
In preparing the business plan you will come in contact with many people outside your startup
team In addition to investors you will talk to many specialists including attorneys tax
advisors experienced entrepreneurs and experts The business plan competition organizers
will help you get in touch with just the right people You will also have to begin reaching out to
your potential customers (ie by means of consumer surveys) to make initial assessments of
your market Always keep in mind that customer acceptance is an essential prerequisite to the
success of your company Scout about for possible suppliers and perhaps close your first
agreements You will also want to become aware of who your competitors are
This whole process will not come cheap The team must continue to earn a living while running
a rudimentary operation and perfecting a prototype Yet at this stage you should also be able
to estimate your expenses Financing will generally still be provided from the same sources you
relied on during stage one although some investors may be willing to make the occasional
advance This stage concludes successfully for you as a new entrepreneur when an investor
expresses a willingness to finance your undertaking
Stage 3 Startup and growth
5
Now that the conceptual work is largely complete it is time to start implementing your
business plan Your role now changes from that of architect to that of builder Business success
must now be sought and achieved in the market The day of reckoning has come when you will
learn whether your business concept was a good and ultimately profitable one
Investor exit en route to becoming an established company
The pullout of your initial investors is a completely normal step in the development of a startup
For if everything has gone well your risky venture will have gradually become a stable
enterprise (see Exhibit 4) In the course of its short life you have created a number of jobs and
wooed many customers with your innovative solution to their problem Your commitment is
paying off as the value of your business increases
A profitable exit has been the objective for the venture capitalist from the outset Capital
recovery can happen in very different ways Normally the business is sold to a competitor
supplier or customer Or it is listed on the stock exchange (the initial public offering or IPO)
It is also possible for investors who want out to be paid off by the other partners
6
2 THE BUSINESS IDEA
There is nothing in the world as
powerful as an idea whose time has come
Victor Hugo
The above statement undoubtedly applies to ideas for starting a new business But how do you
come up with such an idea And how can you know if the idea for the business will have a
promising future
Studies show that the lion＇s share of original and successful business ideas were generated by
people who had already had several years of relevant experience Gordon Moore and Robert
Noyce for example had a number of years at Fairchild Semiconductors behind them before
teaming up with Andy Grove to form Intel But there are also examples of revolutionary ideas
brought to life by mere novices as Steve Jobs and Steve Wozniak demonstrated when they
dropped out of college to start Apple Computer
21 Developing a business idea
In economic terms a spark of genius is worthless no matter how brilliant it may be For an idea
to grow into a mature business concept it must be developed and refined usually by many
different people
The initial idea must first pass a quick plausibility check
Before you follow up on an idea you should evaluate it in light of its (1) customer value
(2) market chances and (3) degree of innovation as well as considering whether it will be
both (4) feasible and profitable
Talk your idea over with friends professors experts and potential customers
The broader the support you find for your idea the better you will be able to
describe its benefits and market opportunities You will then be well
prepared when the time comes to discuss your project with professional
investors
Is your idea really novel Has someone else already developed it or even
applied to patent it
Will it be possible to develop your idea in a reasonable period of time and
with a justifiable level of resources
It takes at least four weeks to develop a business idea
Considering the multiple stages of development it is improbable – and fairly unrealistic – that
you will spend fewer than four weeks developing your concept Generally a business idea is
not worthy of being financed until it is so concrete that it can be launched in the market in the
foreseeable future at reasonable risk Investors talk of the seed phase of a business concept
7
5
ELEMENTS OF A PROMISING BUSINESS IDEA
Exhibit 5
Clear
customer
value
Market of
adequate size
Feasibility
and
profitability
Sufficient
degree of
innovation
1 2
4 3
which usually has to be financed with soft money (ie from sources that as yet place no hard
and fast demands on the success of the idea)
The seed phase can take longer in particular if the idea is ahead of its time Although the
perfect product has been found it cannot yet be marketed because the development of
complementary technologies or systems is still in the works One example is the Internet The
ideas for marketing products and services came early but a lack of security in the available
payment systems hampered and delayed its commercial exploitation for some time
22 Elements of a promising business idea
A business idea can be considered promising if it has the following four elements (Exhibit 5)
1 Clear customer value
The key to success in the marketplace is satisfied customers not great products Customers
spend their hardearned money to meet a need or solve a problem The first principle for
developing a successful business idea is that it clearly shows which need it will fulfill and how
it will do so Initially many entrepreneurs have the product and the technical details of design
and manufacture in mind when they speak of their solution Not so for the investor – the
investor first looks at the idea from the perspective of the market For investors customer value
takes top priority and everything else is secondary What＇s the difference If innovators say
our new device can perform 200 operations per minute or our new device has 25 fewer
parts they are focusing on the product By contrast saying our new device will save the
customer a quarter of the time and therefore 20 of the costs or our new solution can boost
productivity by up to 25 adopts the customer＇s point of view The product is merely a
means of delivering value to customers
The customer value of a product or service expresses what is novel or better about the item
when compared to competitive offers or alternative solutions As such it plays a key role in
8
setting your product apart from others – a core issue in marketing as we will learn – and is
essential to the market success of your business concept Try whenever possible to also
express the customer value in figures
Marketing theory states that the customer value must be formulated into a unique selling
proposition or USP This means two things First of all your business concept must be
presented in a way that makes sense (selling proposition) to the customer Many startups fail
because the customer does not understand the advantage of using the product or service and as
a result does not buy it Secondly your product must be unique Customers shouldn＇t choose
just any solution that hits the market – they should choose yours You must therefore
persuade them that your product offers a greater benefit or added value
Only then will your customers give you an edge In describing your business concept you need
not present a fully formulated USP but it should be more or less obvious to potential investors
2 Market of adequate size
A business idea will have economic value only when it succeeds in the market This second
principle of a successful idea demonstrates how big the market is for the product offered which
target group(s) it is designed for and to what degree it will differ from the competition
A detailed analysis of the market is not yet necessary at this point Estimates derived from
verifiable basic data will suffice Sources could include official statistics information from
associations articles in trade journals the trade press and the Internet It should be possible to
draw a reasonable conclusion about the size of the target market from this basic data It is
sufficient for you to summarize the results of this investigation in your presentation of the
business idea
The same is true for your target customers you will only need a loose definition of who they
will be Describe why your business idea will provide a special value to this group in particular
and why this group is financially the most interesting to you
You will always face competition – both direct from companies that offer a similar product and
indirect from substitute products that can also fulfill the customer＇s need A pasta
manufacturer competes not only with other pasta manufacturers but also with manufacturers
of rice and potato products and bakeries and more generally with manufacturers of all other
food stuffs Your business idea will need to demonstrate that you have understood who your
competitors are Name them – and describe why and how you can take the lead with your
business idea
3 Sufficient degree of innovation
Business ideas can be classified along two dimensions productsservices and business systems
In each of these categories you can develop something new or capitalize on something that
already exists Simplified a business system is a way of understanding how a product or
service is developed manufactured and marketed (Exhibit 6)
The term innovation is generally used in the context of new products which are made with
conventional production methods and delivered to the customer through existing distribution
9
channels Microsoft for instance developed DOS making use of the IBM sales organization to
bring it to the market
Innovations in business systems are less obvious but just as important The success of Dell is
attributed to significant cost savings thanks to a new form of direct distribution and a novel
production process in which a computer is produced only after it is ordered and in the shortest
possible time frame
In developing new products improvement of the multilayered dimension customer value is
at the forefront Innovations in the business system are targeted at lower costs and faster
processes savings which can then be passed on to the customer in the form of lower prices
It is rare that both types of innovation – in product and business system – can be combined to
create a completely new industry Netscape contributed significantly to the success of the
World Wide Web by distributing its new browser over the Internet free of charge In doing so
Netscape passed up initial sales revenues but through the increased number of visitors to its
Web site succeeded in raising advertising revenues
4 Feasibility and profitability
Finally to arrive at an actual startup the feasibility of the business idea must be assessed In
addition to specific factors that could make the project not feasible (eg legal considerations
standards) the assessment may include the time and resources needed to carry out the project
The construction of hotels on the moon may be technically feasible for example but their costbenefit
ratio is unreasonable
Interwoven with the feasibility criterion is profitability A company must be able to generate
longterm profit This fourth element of a successful business idea should thus indicate how
much money can be made and how
Traditionally profit calculations for a business are made as follows A company buys material
or services thereby incurring costs It also sells products or services to customers thereby
10
earning revenues If your business follows this pattern it is not necessary to provide any
greater detail in the description of your idea Do however make rough estimates of anticipated
expenses and profits One rule of thumb for growing companies is that the startup phase
should generate gross profits (revenues minus direct product costs) of 40 to 50
But many businesses do not function according to this traditional model McDonald＇s for
example earns its money from the licensing fees it charges franchisers The restaurant owner
pays McDonald＇s for the name and the way the restaurant is run If your business idea is based
on this kind of innovation in profit generation you should detail it in your business idea
KEY QUESTIONS Business idea
Who will buy your product
Why should customers buy the product What need does it fulfill
How will the product be distributed to the customer
What exactly is innovative about your business concept
How is the business concept unique Is it protected by patent
How is the product better than comparable alternatives
What competitive advantages will the new company have and why can’t a
competitor simply copy them
Can money be made with the product What costs will be incurred what
price will be asked
23 Protecting your business idea
Only a few ideas are genuinely ingenious True breakthroughs are the result of hard work and
therefore cannot be easily replicated A compromise must be found to protect the idea while
disclosing sufficient information to test its viability
Patenting
Early patenting is recommended especially in the case of new products or processes Get the
advice of experienced patent lawyers The future success of your business can depend on a
patent and in every industry there are powerful competitors with the means to keep an
unfavorable patent from being granted But some degree of caution is advised as a patent can
also miss the mark when it comes to protecting your idea by making the idea public Be sure to
keep in mind if the patent can be improved upon easily – and thus thwarted The recipe for
CocaCola for example is still secret and has never been patented because the patent can be
circumvented with a very few neutraltasting changes
Confidentiality agreement
11
Lawyers trustees and bank employees are all required by law to maintain confidentiality visàvis
their clients＇ businesses Venture capitalists also have an interest in keeping things under
wraps as someone with a reputation for poaching ideas will not be made privy to new ideas
any time again soon The same is true for professional consultants A confidentiality agreement
can be effective in some cases The coaches and organizers involved in EnterPrize are required
to sign a confidentiality agreement judges are encouraged to do so But like every legal
document it has its limits and there are gray areas that could make it difficult to prove a
violation of the agreement in court
Quick implementation
Your best protection against intellectual property theft is probably to implement your plan as
quickly as possible A great deal of work must be done between dreaming up an idea and
opening for business This effort can keep potential copycats at bay because in the end it＇s
crossing the finish line first that makes you the winner not having the fastest shoes
24 Presenting your idea to investors
How you present your business idea to an investor will put all your previous efforts to the test
It is critical to attract attention and pique interest through content and professional appearance
Good venture capitalists are presented with up to 40 business ideas per week and their time is
limited In submitting the business idea neither fanfare nor a wealth of details is as important
as a clear and thoughtful presentation
Example 1 The hard sell
I have a great idea for a new customerfriendly method of payment with a big future This is
something everybody has always wanted You could earn a lot of money from this … The
investor thinks That sounds like a lot of hot air I＇ve heard of a hundred such miracle solutions
before … Next
Example 2 The technical approach
I have an idea for a computerized machinery control system The key is the fullyintegrated
SSP chip with 12 GByte RAM and the asymmetrical XXPbased direct control unit It took me 5
years to develop this The investor thinks Techie In love with technology She＇s her own
market … Next
Example 3 The entrepreneur
I have an idea that will enable companies with up to 100 employees to save 3 to 5 of their
costs Initial costprice analyses have convinced me that a spread of 40 to 60 should be
possible I have found a focused advertising channel through the Association of Small and
Mediumsized Businesses and the ABC Magazine The product will be distributed by direct
sale The investor thinks Aha She has identified the customer value and even worked out
the figures She＇s thought about the market and the profit potential and knows how she will get
the product to her customers Now I＇d like to get a look at the product…
These examples demonstrate why clarity should be your foremost goal It is best to assume that
investors are not familiar with the technology of your product or the industry jargon They are
also not likely to take the time to look up an unknown term or idea Describing your concept
12
clearly and incisively is your next goal You must be able to convey the basic mechanics of your
business idea to an investor with credibility There will be plenty of time at a later point for
detailed descriptions and exhaustive financial calculations
Formal requirements of a business concept presentation
Title page
Name of the product or service
Name of the person(s) submitting
Confidentiality notice
Illustration where appropriate of the product or service in action
Body
4 to 7 pages (including a onepage executive summary)
Clear structure with headings and indentations as visual organizers
Charts illustrations tables
Maximum of 4 illustrations placed in the appendix
Use only if necessary for comprehension
Make reference to the illustrations in the text
Simple clear presentation
Uniform format
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13
3 THE BUSINESS PLAN
Writing a business plan forces you into disciplined thinking
if you do an intellectually honest job An idea may sound great but
when you put down all the details and numbers it may fall apart
Eugene Kleiner Venture Capitalist
The modest term business plan does not really do justice to this very important business tool
The business plan was first used in the US as means of acquiring funds from private investors
and venture capitalists who then participate in the company as coowners and provide the
capital The presentation of this type of startup strategy has become a mandatory courtesy
when seeking to do business with any partners including customers suppliers and distributors
to say nothing of venture capitalists and banks But business plans are not only used by startups
even major corporations rely increasingly on projectspecific business plans to help them
make internal investment decisions
31 Advantages of a business plan
The great importance attached to the business plan is well justified With it entrepreneurs can
prove that they are in a position to articulate and handle the diverse aspects of startups and
their management Properly conceived and executed the business plan becomes a key
document for evaluating and managing an operation
A business plan details the overall entrepreneurial concept behind a planned business It gives
an exact summary of the economic circumstances the targets set and the resources necessary
The business plan forces entrepreneurs to think through their ideas systematically It identifies
gaps in knowledge demands decisions and promotes the formulation of a wellstructured and
focused strategy During its preparation one after the other alternative approaches come to
light and are evaluated and pitfalls are identified With its clear analysis of the situation the
business plan becomes an invaluable tool for overcoming problems and contributes
substantially to boosting efficiency and effectiveness
32 Characteristics of a successful business plan
How a business plan is designed depends on what kind of venture is envisioned and what the
plan should accomplish If a plan is being written for a startup for example it will necessarily
have a different structure than one that aims to launch an existing company into a new segment
Despite such differences business plans have a number of things in common They are to
provide a clear and comprehensive evaluation of the opportunities and risks posed by the
operation This is no small task and completing it will require careful attention to certain
standards of design and content
The following suggestions and guidelines should help you make your plan successful
14
A good business plan impresses with its clarity
Readers should be able to find suitable answers to their questions It should be easy for readers
to find the topics in which they are particularly interested This means the business plan must
have a clear structure to enable readers to maneuver and choose what they would like to read
It is not the volume of analysis and data but rather the organization of the statements and a
concentration on the essential arguments that will persuade your readers Any topic that could
be of interest to the reader should therefore be discussed fully but concisely A total length of
about 30 pages give or take 5or so is generally appropriate
A business plan is not read in the presence of the author who could answer questions and
provide explanations For this reason the text must be unambiguous and speak for itself Each
plan should be presented to a test audience if at all possible before it is finally submitted
Competition coaches for example can help weed out confusing passages or indicate areas still
in need of editing
A good business plan convinces with its objectivity
Some people get carried away when they are describing what they feel is a good idea While
there is something to be said for enthusiasm you should try to keep your tone objective and
give the reader a chance to carefully weigh your arguments A plan written like glowing
advertising copy is more likely to irritate than appeal to your readers making them suspicious
skeptical or otherwise unreceptive
Equally dangerous is being too critical of your own project in response to various past
miscalculations or mistakes This approach will raise questions about your ability and
motivation To the best of your knowledge the data presented should be accurate Weaknesses
should never be mentioned without introducing methods to correct them or plans to do so
This does not mean that fundamental weaknesses should be hidden just that in preparing your
plan you should develop approaches to remedy them and present with clarity
A good business plan can be understood by the technical layman
Some entrepreneurs believe that they can impress their readers with profuse technical detail
elaborate blueprints and the small print of an analysis They are mistaken Only rarely are
technical experts called to evaluate this data carefully In most cases a simplified explanation
sketch or photograph is appreciated If technical details on the product or manufacturing
process must be included you should put them in the appendix
A good business plan is written in one consistent style
Several people usually work together to produce the business plan In the end this work must
be integrated to avoid creating a patchwork quilt of varying styles and analytical depth For
this reason it is best to have one person edit the final version
A good business plan is your calling card
Finally your business plan should have a uniform visual layout The fonts for example should
be consistent with the structure and contents effective graphics neatly integrated and perhaps
a header with the (future) company logo used
15
Exhibit 7
Seed
Before
startup
Mainly to
develop
business
concept
further
Growth
stage
At first or
second
growth spurt
IPO still far
off
To finance
growth
Early phase Growth phase
Exit
As a rule 58
years after startup
Recovery of
invested venture
capital for
reinvestment in
more startups
Transition to
established
company
VENTURE CAPITAL PARTICIPATION IN THE VARIOUS STARTUP PHASES
Startup
At or shortly
after startup
Eg for
product
development
initial
marketing
activities
Bridge stage
612 months
before IPO
To cover
financial
needs until
sale of stock
to public
When
What
for
33 The investor’s point of view
The entire startup process must focus on successful capital acquisition Professional investors
are the first real acid test of the chances your business concept will have Address your
communication entirely to them and learn to think like they do They will not be satisfied with
a mere description of your business concept even if it is brilliant
What is venture capital
Venture capital is the money that is made available by venture capital companies or individuals
to finance new businesses Typically such projects have a high chance of being profitable
while facing an equal risk of incurring loss Experience shows that of 10 businesses financed
with venture capital only one will triumph three will manage to eke out an existence three will
waste away and three will be a total loss It is only natural for venture capitalists to do
everything in their power to generate profits in line with the risk ventured Accordingly they
back up a project very intensely in order to harness as much potential as possible (Exhibit 7)
What do venture capitalists look for
Venture capitalists look for a number of important pieces of information in a business plan
Management experience and competence All investors pay particular
attention to who will be managing the enterprise When all is said and done
the ability of management to implement the concept is a major determinant
of whether a business survives or fails Particularly in industries where
innovation is critical the focus is on the proper mix of all necessary
management skills that one person alone will rarely have Entrepreneurial
16
experience is more highly valued than academic degrees Another test of a
worthwhile investment is the ability of management to work as a team
A welldefined and where possible quantifiable customer value In its
simplest form this means lowering the cost of delivering an existing value or
creating a new value if this can be achieved at reasonable cost
Innovative product or service range The product service andor business
system must possess a high degree of innovation
The possibility to protectsustain the innovation An important competitive
advantage to your company could be a patented idea
A growing andor large market Venture capitalists prefer startups that
demonstrate a potential to achieve significant sales of approximately 30
million within 5 years
An effective concept for capturing a clearly defined target customer
segment Potential investors want to see that you have a clear understanding
of your market and how you intend to reach your customers Your forecasts
and estimates should be based on wellfounded persuasive assumptions and
facts
A farsighted analysis of the competition Investors aren＇t naive – so don＇t
even try to claim that your product has no competition A complete and
objective description of existing and potential future competitors however
shows that you are aware of the risks you are taking which in turn will
inspire confidence in you Here again having an idea that can be protected
by law (patented trademarked) is an advantage
A careful weighing of the risks and opportunities Investors hate surprises
especially negative ones A realistic description of the risks you face and how
you plan to overcome them is far more credible than looking at the future
through rosecolored glasses
Detail possible exit routes Investors want to know from the outset when
their commitment will end and how they will recover their investment
Generating a profit is always the object and the purpose of investor
participation The more productive options you can show them for how to
do this the better The main possibilities include going public or selling
shares to the other partners or to other companies
What do venture capitalists do for the new company
Venture capitalists play a number of roles (see Exhibit 8) But they will also take over the reins
if the business does not achieve its targets How should you choose a venture capitalist
Venture capitalists generally expect to have a high stake in the new company In return they
provide support that goes far beyond a financial commitment and often shoulder a great deal of
17
23
POSSIBLE ROLES OF VENTURE CAPITAL COMPANIES
Coaches and
motivators of the
startup team
Advisors in
achieving success
(sale of the
company IPO)
Specialists in
forming new
companies
Gateways to a
network of
experienced
entrepreneurs
Possible roles of
venture
capitalists
Exhibit 8
responsibility for the success of the venture But potential investors do differ and the company
team should know its investors well If you would rather own 20 of a 100 million company
than 80 of a 5 million operation you will have to choose your investor according to more
criteria than just who will provide the most money at the best rate
34 Tips on preparing a professional business plan
Investors are interested in the finished plan not the process you went through to produce it
They prefer to see a wellprepared document from which they can gain a good sense of the risks
and opportunities involved on the first readthrough When preparing your plan the themes of
customer value and potential return should run through the descriptions of your business
objectives
The three phases of the competition provide a general structure for preparing your plan The
three phases build upon one another such that the contribution for a previous phase will
become a major portion of the following phase supplemented with additional elements How
you carry out the work within each phase is up to you The following tips are designed to help
you
Plan your approach
Drawing up a business plan is a very complex undertaking Many variables must be
considered and analyzed systematically in a logical order A detailed outline should be made
as soon as the first ideas are laid down It is smart to do your planning along the lines of a
business plan or according to your business system (eg R&D production marketing sales
delivery and administration) You should also number your topics and note any references
Using a word processing program with a spreadsheet is helpful All reference material should
be sorted by topic Do the same with notes from discussions
18
Tailor key questions to your specific project
Using a set of questions is helpful in preparing your business plan Which questions should be
asked and which answers included in the plan is determined by the type of value created the
product service or degree of technological sophistication and what the readers need to know
You can use the sample questions provided in this Guide to write your own series of questions
These questions are only examples designed to get you thinking they should not be taken as an
exhaustive list of possible questions
In other words you are neither required to answer each question nor must you reply to all
questions in equal depth It is up to you to decide which questions are relevant to your
undertaking and necessary to understand it You must also consider whether there are other
questions to be answered beyond those that have been provided
Focus on the final product
In projects of this kind there is always a danger of getting lost in the details of each analysis
Step back from time to time and ask yourself whether the data provided is not already sufficient
and whether further analysis will really be beneficial
We also recommend that you limit the length of the results for each of the three competition
phases You will save a lot of time and energy if you stick to the recommended lengths from
the beginning of your planning
Seek support early
Gathering support from many different parties will be important in this competition Teaming
up early is one such form of support Teams with complementary technical and entrepreneurial
experience can delegate assignments according to the talents of the individual team members
This will help ensure that the work will be performed efficiently
Do not hesitate to seek help from outside sources as soon as you need it Contact experts and
experienced entrepreneurs whom you meet at competition events or call the EnterPrize office
for assistance
Keep testing your plan
A winning entry will be easy to understand and follow Therefore it is important to present
your idea to a test audience along the way People outside the competition who critique your
plan before you submit it can identify weaknesses and even give your work fresh impetus
19
Exhibit 9
ELEMENTS OF A BUSINESS PLAN
Focus of this phase
Part of this phase
Phase 1 Phase 2 Phase 3
1 Executive summary
2 Product or service
3 Management team
4 Market and competition
5 Marketing and sales
6 Business system and organization
7 Implementation schedule
8 Opportunities and risks
9 Financial planning and financing
4 STRUCTURE AND KEY ELEMENTS OF A
BUSINESS PLAN
Despite their many differences all business plans have certain elements in common that all
potential investors expect to find (Exhibit 9) Additionally an appendix is often included that
contains detailed information often presented in the form of tables or graphs Within this more
or less required structure the business plan is free to grow in its own direction At the
beginning you will only work on a few key elements and individual topics New elements are
added with each additional phase while the topics from the previous phases are expanded and
gradually the plan fills with content At the end of the third phase the individual analyses
form a whole whose individual parts correspond to one another
41 Executive summary
A good executive summary gives me a sense of
why this is an interesting venture I look for a very
clear statement of the longterm mission an overview
of the people the technology and the fit to market
Ann Winblad Venture Capitalist
The executive summary is designed to pique the interest of decision makers It should contain a
brief overview of the most important aspects of the business plan In particular it should
highlight the product or service the value to the customer the relevant markets management
expertise financing requirements and possible return on investment
20
Venture capitalists look at the executive summary first though they usually just skim it The
quality of the summary itself is not likely to make them invest in your project yet it can
convince them not to A clear objective and concise description of your intended startup
which must be easy to comprehend especially by the technical layperson will show them that
you know your business Therefore prepare your summary with the utmost care it may well
decide whether the rest of your business plan is read
The executive summary is an independent element of the business plan Do not confuse it with
the introduction of your business concept on the title page Look at your executive summary
with a critical eye – repeatedly – especially after all other aspects of your business plan have
been completed Ask yourself if you have described your business idea as clearly compellingly
and concisely as you can
Your readers should be able to read and comprehend the summary in five to 10 minutes Test it
Give your executive summary to someone who has no previous knowledge of your business
concept or its technical or scientific basis
KEY QUESTIONS Executive summary
Phase 1
What is your business idea In what way does it fulfill the criterion of
uniqueness
Who are your target customers
What is the value for those customers
What market volume and growth rates do you forecast
What competitive environment do you face
What additional stages of development are needed
How much investment is necessary (estimated)
What longterm goals have you set
Phase 2
How high do you estimate your financing needs
What are the sales cost and profit situations
What are the most important milestones along the way to your goal
What test customers have you approachedcould you approach
What distribution channels will you use
What partnerships would you like to enter into
What opportunities and risks do you face
What is the picture on patents
Phase 3
Summarize the results of your detailed business planning and state your exact
financing needs
How will you delegate management tasks
How much production capacity is necessary
How will the implementation of your business idea be organized
List your next concrete steps
21
42 Product or service
If you don＇t know what the customer value is
the whole thing＇s a waste of time
Bruno Weiss Entrepreneur
Your business plan derives from an innovative product or service and its value to the end
consumer It is important to indicate how your product differs from those that are now or will
be on the market A short description of how far development has progressed and what still
needs to be done is also essential
Customer value
It doesn＇t make any sense to start up a new business unless the product or service is superior to
current market offerings Be sure to discuss in detail the function the product or service fulfills
and the value the customer will gain from it
If comparable products and services are already available from your competitors you must
convincingly substantiate the added value your customers will receive from your startup To
do so put yourself in the place of the customer and weigh the advantages and disadvantages of
your product over the others very carefully applying the same criteria to all
If you are offering a range of innovative products or services categorize them into logical
business areas according to product or customer Define the business areas in detail so there is
no overlap
Development status of the productservice
In explaining this issue imagine you are the venture capitalist who wants to minimize the risk
involved in participating Try to refrain from including technical details and describe
everything as simply as possible A finished prototype will show your potential investor that
you are up to meeting the technical challenge If it enhances the understanding of your product
include a photo or sketch in your business plan It is even better to have a pilot customer who
already uses your product or service
You should also explain the nature of the innovation itself and the edge you have over
competitors This is the point at which you should address the subject of patents for protection
from duplication or imitation or the protection of a model through registration If there are still
problems or issues to cover regarding development be sure to mention them and how you
intend to overcome these difficulties
Regulatory requirements on products and services pose another set of risks Note any permits
you have obtained have applied for or will apply for such as those of technical control
associations the postal service or the department of health
22
KEY QUESTIONS Product or service
Phase 1
What end customers will you address
What are the customer’s needs
What customer value does your productservice provide
What is the nature of your innovation What is the current status of technical
development
What partnerships are necessary to achieve full customer value
What competitor products already exist or are under development
Is your productservice permitted by law
What are the prerequisites for development and manufacturing
What stage of development has your product or service reached
Do you have patents or licenses
What further development steps do you plan to take What milestones must
be reached
Phase 2
What versions of your productsservices are designed for what customer
groups and applications
What patentslicenses do the competitors have
Do you need to obtain licenses and if so from whom and at what cost
What kind of servicemaintenance will you offer
What product or service guarantees will you grant
Compare the strengths and weaknesses of comparable productsservices
with yours in an overview
Phase 3
What resources (time personnel materials) do you require for each
subsequent development
What share of sales do you expect from your various productsservices (if
applicable) Why
What income from royaltiessales do you estimate from possibly marketing
the property rights Who would be your licenseesbuyers
43 Management team
I invest in people not ideas
Eugene Kleiner Venture Capitalist
The management section is often the first part of the plan that venture capitalists turn to after
reading the executive summary They want to know whether the management team is capable
of running a promising business Entrepreneurs frequently underestimate the significance of
this question and make the mistake of skimping on content and making do with meaningless
phrases
23
Take the time to describe your management team well When discussing management＇s
qualifications be sure to emphasize those that are particularly important for implementing your
specific plans Professional experience and past success carry more weight than academic
degrees If key positions are to be given to inexperienced staff members explain this decision in
detail
CHARACTERISTICS OF A POWERFUL MANAGEMENT TEAM
Common vision Everybody wants to succeed
Complementary attributes and strengths
At least three but usually no more than six people
Sticks together through thick and thin
Staying power even when there are setbacks regroups and makes a
second or even third attempt to clear the hurdle
Also explain how the responsibilities in the company are to be delegated and indicate which
positions still require reinforcements It is particularly helpful to compare the assignments to be
filled with the skill profiles of current team members Do not hesitate to name your most
influential advisors No one will have all the qualifications and experience necessary to found a
company Considerable involvement on the part of advisors such as experienced entrepreneurs
accountants PR firms or management consultants is a sign of professionalism and will reassure
the venture capitalist that you have all the contacts you may need
WHAT PROFESSIONAL INVESTORS LOOK FOR
Has the team already worked together
Do team members have relevant experience
Do the founders know their weaknesses and are they willing to make up for
them
Have the founders agreed on their future roles Are ownership issues settled
Has the management team agreed on a common goal or are there
underlying differences of opinion
Do the individual team members fully back the project
Finally although the management team will not be evaluated until the third phase of the
business plan competition it is advisable to begin looking for suitable partners as soon as
possible Bringing together just the right people to form a dream team so to speak is
immensely important for later business success and therefore requires a great deal of time and
care
24
KEY QUESTIONS Management team
Phase 3
Who are the members of your management team and what distinguishes
them education professional experience success standing in the business
world
What experience or abilities does the team possess that will be useful for
implementing your concept and setting up your company
What experience or abilities are lacking How will the gaps be closed By
whom
What goals do the team members pursue by starting up the business
How high is the motivation of each individual team member
44 Market and competition
If there is no competition
there is probably no market
Brian Wood
Thorough understanding of your customers and their needs is the foundation of every
successful business For it is the customers who give your company a reason for being And in
the end by buying – or not buying – your product or service they will decide if and how
successful your company will be Only those customers who are convinced they are getting a
greater value than they would from a competing product or by not buying a product at all will
buy your product Knowing your market and competition well is thus critical to the success of
your undertaking
Market size and growth
A dramatic increase in the value of the company can be expected only if the market holds great
potential The market size should be presented in figures representing the number of customers
unit sales and total dollars in sales Your expectations for market growth are critical You
should also indicate what main factors are now influencing or may influence the given industry
segment Show what factors will affect developments (technology legislative initiatives etc)
and what relevance these factors have for your business Work with a focus in order to save
yourself some energy Work with hypotheses make a list of questions you want answered
what information you will need and where you might find it
The external data necessary for an analysis are often easier to obtain than you might think Be
creative and determined make use of all possible sources including trade literature (journals
market studies scholarly essays) industry directories associations and government agencies
(statistics offices chambers of commerce patent offices) banks for industry surveys databases
the Internet (keep your searches focused) and of course interviews It often helps to call
around Using a short discussion outline will increase your efficiency and productivity as well
as the willingness of your party to disclose information
25
This collection of individual pieces of data seldom provides a direct answer to your questions –
you will have to draw wellfounded conclusions or make sound estimates When making an
estimate observe the following
Build on a solid foundation There may be many unknowns but if you rely
on easily verifiable figures your estimate will be harder to topple
Think logically An estimate should be a logical conclusion (ie it should
not have any leaps in logic or depend on unspecified assumptions)
Compare your sources Check your facts such as statements made in an
interview with a number of different sources if at all possible
Be creative The shortest distance to your goal is not always a straight line
For example when a variable is unknown look for a substitute variable that
relates to the one you need
Check for plausibility For each estimate ask yourself Does this result
really make sense
Market segmentation
Follow up your general explanations with your choice of target customer and your planned
market success (sales volumes sales revenues market share and profit) To do this you must
segment your market The choice of segmentation criteria is up to you as long as you are
certain that the number of customers in each segment as well as their behavior can be
determined and that the customers within each segment can be reached by means of the same
marketing strategy
Possible customer segmentation criteria for the consumer goods markets
Location country urbanrural (population density)
Demographics age sex income profession company size
Lifestyle techies counterculture active seniors
Behavior frequency of product use product application
Buying habits brand preferences price consciousness
Possible customer segmentation criteria for industrial goods markets
Demographics company size industry location
Operations technology employed (eg digital analog)
Buying habits centralized or decentralized purchasing purchasing criteria
supplier agreements
Situational factors urgency of need order size
26
Define the potential sales revenues for a given period per segment Take your sales strategy
and the behavior of the competition into consideration Depending on the industry you may
also want to allow for price erosion
Competition
Define the strengths and weaknesses of your competitors To do this evaluate your major
potential competitors using the same criteria such as sales volume and revenues (pricing)
growth market share cost positioning product lines customer support target groups and
distribution channels In the interest of brevity forgo the use of a great deal of detail Evaluate
your own company according to these same criteria and make a comparison as to how
sustainable your competitive advantage will be
Positioning visàvis the competition
Why should a potential customer buy your product and not that of your competitor Because it
offers greater value (in some aspect that is important to the customer) than competing products
because it is objectively or emotionally better or as marketing experts would say you have
developed a value proposition or unique selling proposition for your business idea
Formulating this value proposition and anchoring it firmly in the mind of the customer is the
main task of marketing communication Marketing experts talk about the positioning of a
product brand or business Wellpositioned products leave consumers with a particular
impression The most important guideline for positioning is therefore to look at the product
from the customer＇s point of view The point is to meet a need better not to present new
product attributes The advantage to the customer must be immediately clear memorable and
important At the same time your positioning must be distinctive from that of competitors
Only then can customers connect the value proposition that you offer with the name of your
product or business and buy your product The following guidelines may help
Identify relevant customer needs or problems
Define clear customer segments of sufficient size
Design an attractive range of products and services
Make yourself unique through differentiation from the competition
Address the subjective perception of the customer
Ensure customer satisfaction even after purchase
Because positioning is so critical to the market success and therefore to the longterm success
of your business you should pay particular attention to it Persuasive positioning will not come
about immediately it will be a result of intense effort and will need frequent revision to achieve
the maximum effect The point of departure for positioning is the product itself Additional
insight will be found as you refine and modify your product during development and respond
to new revelations as a result of customer surveys
27
KEY QUESTIONS Market and competition
Phase 1
How is the industry developing
What factors are decisive for success in your industry
What role do innovation and technological advances play
How will you segment the market
What market volumes do the individual market segments have now and in
the future (rough estimates)
Who are your target customer groups
What customer examples can you give
What major competitors offer similar productsservices
What new developments can be expected from competitors
How sustainable will your competitive edge be
Phase 2
What market volume (value and amount) do you estimate for your individual
market segments over the next 5 years
What will influence growth in the market segments
What is your estimate of current and future profitability of the individual
market segments
What market shares do you hold in each market segment
What segments are you targeting
Who are your reference customers How do you plan to get reference
customers
What role do service consulting maintenance and retail sales play
How much do you depend on large customers
What are the key buying factors for customers
How does the competition operate What strategies are pursued
What are the barriers to market entry and how can they be overcome
What market share does your competition have in the various market
segments
What target groups do your competitors address
How profitable are your competitors
What are your competitors marketing strategies
What distribution channels do your competitors use
How sustainable will your competitive edge be Why
How will competitors react to your market launch How will you respond to
this reaction
Compare the strengths and weaknesses of your major competitors with your
own in the form of an overview
45 Marketing and sales
Marketing is far too important
to be left to the marketing department
David Packard Entrepreneur
28
Key elements of a wellconceived business concept are wellplanned marketing and sales
activities They require a persuasive description of your strategies for market launch marketing
and the measures planned for sales promotion A skeleton framework to follow is that of the
four Ps product price place and promotion
1 Product
Your original product idea has already given you some sense of the characteristics of your
product After a closer analysis of the needs of various customer segments you now must
evaluate whether your product actually meets them or to what extent it may require adaptation
This raises the question of whether you should manufacture one single product for all segments
or whether you want to adjust the product to meet the needs of individual segments
2 Price
The basis for an attainable price is the willingness of customers to pay the price asked of them
This contradicts the conventional wisdom that price is derived from costs Of course cost is a
considerable factor but the costprice ratio only becomes critical when the price asked will not
cover costs within the foreseeable future In this case it is advisable to get out of the business as
quickly as possible or better yet never to go into the business in the first place
The price you can ask depends entirely on how much the value of your product is worth to the
customer You have defined and perhaps quantified the customer value in the business
concept or product description Now define a price bracket based on the quantified customer
value of your product You can verify and refine your assumptions through discussions with
potential customers
The pricing strategy you choose depends on your goal Do you want to penetrate the market
quickly by going with a low price (penetration strategy) Or do you want to generate the
highest possible return from the outset (skimming strategy)
New companies generally pursue the skimming strategy for good reason
A new product is positioned as better than previous options so a higher
price can be justified
Higher prices generally lead to higher profit margins and allow the new
company to finance its own growth New investments can be financed out of
profits and outside investors are no longer needed
Unlike the skimming strategy the penetration strategy generally requires
high initial investment in order for supply to meet the high demand This
heightened investment risk is something investors usually prefer to avoid
Certain situations make following a penetration strategy the better choice
Setting a new standard Netscape distributed its Internet browser free of
charge thus setting a standard With the Macintosh however Apple
29
followed a skimming strategy and missed the chance to establish the Mac as
the new standard
High fixed costs Businesses with high fixed costs are forced to find a wide
audience as quickly as possible to make those costs worthwhile Fixed costs
at Federal Express for example for air transport and sorting facilities are the
same whether they deliver thousands or many millions of letters
Competition If the entry barriers are low and tough competition is likely a
penetration strategy is the best way to be faster than the competition in
capturing a large market share Such cases naturally also raise the question
as to whether this type of business is appropriate for a startup
3 Place
Your product or service will somehow have to reach the customer physically Although this
may sound simple it involves another monumental marketing decision In what way via which
distribution channel do you want to deliver your product
The choice of distribution channel is influenced by various factors such as how many potential
customers will you have Are they companies or individuals How do they prefer to shop
Does the product require explanation Is it in an upper or lower price bracket Basically you
will have to consider whether your company will handle distribution itself or whether a
specialized operation will handle it for you This sort of makeorbuy decision will have a
significant impact on both the organization and the business system of your enterprise The
choice of distribution channel is thus closely related to other marketing decisions and will in
turn affect other measures
Distribution can be roughly categorized into two forms direct or multichannel Technological
developments particularly in information technology have greatly expanded the spectrum of
distribution channels over the past few years Here is a selection
Thirdparty retailers Products are sold via retailers who have easy access to
potential customers Here it is important to acquire a good shelf position
which is obviously also sought by the competition and is accordingly
expensive The product must also offer retailers an attractive profit if they
are to include it in their range at all
Outside agents Specialized companies act as agents for the distribution of
products from various manufacturers They take over the function of the inhouse
sales person Outside agents are relatively expensive although only
for the sales they conclude successfully They make no commission if they do
not sell the product making them an attractive channel for new companies
since risk is limited Good agents however are not always easy to find
Franchising A business concept is put into practice independently by a
franchisee who pays a licensing fee whereby the franchiser maintains control
of the business policies (McDonald＇s is an example) Franchising enables
30
rapid geographic growth while ensuring control of the sales concept without
huge personal investment
Wholesalers It can be difficult for a small company to maintain contact with
a large number of retailers A wholesaler who has good contacts to the retail
trade can take over this activity helping to improve market penetration while
lowering distribution costs On the other hand wholesalers often demand a
cut for their efforts
Stores Selling in your own store is a good choice when the design of the
purchasing experience is central to the product and only a small number of
stores is necessary to cover the market Independent shops will require
investment but will also allow the greatest control over distribution
Own sales staff Sales agents are above all deployed when the product is
complex (eg capital goods) requiring extensive knowledge of the product
Facetoface customer visits are expensive the number of customers must be
fairly small Having your own sales staff as the distribution channel is
relatively expensive and only worthwhile for involved products
Direct mail Select customers receive a mailing through the postal service
Addresses can be purchased from database companies and sorted according
to desired criteria The success of the direct mailing depends on whether the
reader feels an immediate appeal – otherwise it lands in the wastebasket
Call center Through advertising customers are invited to order a product
by telephone Simple products can be distributed to many customers in this
way with no need to set up stores throughout the entire sales region You
can also hire the services of specialized call center operators
Internet The Internet is a relatively new marketing channel through which
a global market can be reached at minimal cost
4 Promotion
Before potential customers can appreciate your product they have to hear about it And to
achieve this you must advertise to attract attention inform persuade and inspire confidence
Those are the objectives of communication Communication must explain the value of your
product or service to your customers as well as convince customers that your product meets
their needs better than competing or alternative solutions There are various ways of getting
the customer＇s attention
Classic advertising newspapers magazines trade journals radio TV movie
theaters
Direct marketing direct mail to select customers telephone marketing
Internet
Public relations articles in print media about your product business or you
written by you or a journalist
31
Exhibitions trade fairs
Customer visits
Communication is expensive so make the most of it Calculate exactly how much advertising
you can afford per sale and choose your communication messages and media accordingly
Focused communication yields the best results When you address your customers focus on
the people who make the purchasing decision or have the greatest influence on the purchasing
decision
KEY QUESTIONS Marketing and sales
Phase 1
What final sale price do you want to charge (estimated) What criteria did
you use to arrive at this final sale price How high is the profit margin
(estimated)
What sales volumes and sales revenues are you aiming for (estimated)
Phase 2
In which partial market segments will you make your market entry How do
you plan to turn this toehold into a highvolume business
What sales volumes are you targeting (detailed data by market segment)
Describe the typical process of selling your productservice Who among
your buyers ultimately makes the purchasing decision
What target groups will you reach by what means of distribution
Do you want to penetrate the market quickly with a low price or bring in the
highest return from the start Explain your decision
How will you draw the attention of your target groups to your product or
service
How will you woo reference customers
How much in time and resources will it cost to acquire a customer
What advertising materials will you use to do so
What part do service maintenance and hotlines play
How difficult will it be andor what will it cost to create longlasting customer
loyalty
What other planning steps are necessary in the runup to launching your
productservice Draw up a schedule with the most important milestones
Phase 3
What demands (employee number qualifications and outfitting) must the
operation meet in order to effectively implement its marketing strategy What
is your estimated expenditure for this area
How will sales volume and operating results be spread out among the various
distribution channels (estimated)
Which market share per distribution channel do you plan to capture
What are your expenses At launch – and later
What price will you charge for your productservice per target group and
distribution channel
What payment policies will you lay down
32
Exhibit 10
Research and
development
Production Marketing Sales Service
GENERIC BUSINESS SYSTEM
46 Business system and organization
Organizations exist to enable ordinary
people to do extraordinary things
Ted Levitt Editor Harvard Business Review
Business system
Every entrepreneurial assignment is comprised of the interplay of a number of individual
activities When they are presented systematically in relation to one another a business system
results The business system model maps out the activities necessary to prepare and deliver a
final product to a customer For clarity＇s sake they are grouped into functional blocks
Devising a business system is a good way to understand the business activities of a company
think them through systematically and display them with transparency A generic business
system common to nearly all industries and enterprises is shown in Exhibit 10
Use the above model as the starting point for designing your own business system You will
need to adapt it to your own situation and make it concrete in order to put it into practice For a
manufacturer for example it may be useful to subdivide the production category into separate
stages such as purchasing raw materials processing component manufacture and assembly
You may also need to separate sales into logistics wholesale distribution and retail sales for
example
An individual plan will be appropriate to each case depending on the industry in which you
operate and of course the business itself The business system of a computer manufacturer
will be very different from that of a fast food chain And the business system of a department
store may look quite different from that of a direct merchandising company although both will
sell many of the same products There are no general rules or standards for a business system
Your own system should be logical complete and useful for planning – just don＇t let it get too
complicated
Concentrate on the major activities in your business system A team of three to five will not be
able to cover all tasks themselves either because they do not have the abilities or because they
could not do so with the necessary efficiency Together with your management team think
carefully about what activities really create something new and how you and your staff can best
make use of your time to create the highest value for your customer and get ahead of the
competition The buzzword here is focus Once you have determined which activities make up
33
Exhibit 11
SAMPLE STARTUP ORGANIZATION
Managing Director
Mr Dux
Research and
Development
Mr Invent
Production
Mr Facit
Marketing
Ms Oratoria
Finance
Mr Pecunia
Human
Resources and
Administration
Mr Dux
your business system choose those which you can execute better than anyone else A trend
toward specialization can be observed in many industries
Specialization is particularly important for startups They should concentrate all their energy
on just a few select activities in the business system At the beginning even software giant
Microsoft concentrated solely on the development of the DOS leaving all other activities in the
business system up to IBM
Organization
In addition to a business system you will need to consider several other organizational issues
It is essential that tasks and responsibilities be clearly delegated and that you design a simple
organization with few levels The rest will follow as needed during operation Your
organization must be flexible and always adaptable to new circumstances Be prepared to
reorganize your company repeatedly during the first few years Decide who is responsible for
what in each business area (delegation of tasks and responsibilities) As soon as you have set
up the interdisciplinary functions such as a management human resources finance and
administration you＇ll be up and running If you keep your organization simple each staff
member will know which assignments he or she must complete and can carry them out
independently On the other hand everyone should be in a position to fill in for another team
member for a short time if necessary (See Exhibit 11)
Business location
Describe briefly the choice of location for your business Do not enter into a longterm rental
agreement as your business may have to move in response to the growth you anticipate You
may have to make this move fairly quickly
Make or buy and partnership decisions
Once you have determined the core of your business and have drawn up the necessary business
system you will have to think about who will best carry out the individual activities Activities
outside your chosen focus should be handled by third parties But supporting activities within
the new company do not necessarily have to be carried out by you These may include
34
bookkeeping or human resources For each activity the question to ask is Do we do it
ourselves or have someone else do it to make or to buy
Makeorbuy decisions need to be conscious decisions taken after weighing the advantages and
disadvantages Supplier partnerships for example cannot be dissolved from one day to the
next and some partners cannot easily be replaced if for some reason they are no longer
available When considering makeorbuy decisions rely on the following criteria
Strategic significance Those aspects of performance that make a major
contribution to your competitive advantage are of strategic importance to
your business They must remain under your control A technology
company could hardly relinquish research and development and a consumer
goods manufacturer would never give away its marketing activities
Suitability Every business activity demands specific abilities that may not
be available within the management team Your team must therefore
consider whether in specific instances it is best to carry out a particular task
acquiring the necessary abilities or whether it would be better to hand over
the task to a specialized company Specialists may not only be able to carry
out the assignment better they may also be able to offer a cost advantage
thanks to higher production volumes
Availability Before you make a decision to buy you need to find out
whether the product or service is available in the form or with the
specifications you require Negotiate whenever possible with several
suppliers You will usually find the best terms in this way and will learn
more about the service you are buying Often you can help a supplier
improve its performance If you cannot find someone to supply what you
need you may find a business partner who is willing to acquire the necessary
skills to do so
The question for a startup is how you want to cooperate with other companies Every
partnership has its advantages and disadvantages
Informal nonbinding partnerships represent no great obligation for either
side Both parties can end the partnership quickly and easily But they must
also live with the knowledge that supply or demand could dry up just as
quickly Furthermore suppliers will not be able to meet all the special needs
of a customer since they can not sell tailored products to all their customers
Casual partnerships are typical for mass products everyday services and
standardized components for which replacement buyers and sellers are easily
found
Close partnerships are sometimes characterized by a high degree of
interdependence They are typical of highly specialized products and
services or high trade volumes In these situations it is usually difficult for
both sides to change partners or to buy or sell large quantities of special parts
35
within a short time period The advantage for both sides is the security of a
binding relationship and the possibility of concentrating on one＇s own
strengths while benefiting from the strengths of partners
In order for a partnership to develop into a successful business relationship a number of factors
must be considered
Winwin situation Both sides must be able to gain a fair advantage from the
relationship Without an incentive for both sides a partnership cannot be
sustained
Risks and investments Partnerships involve risks that are usually brushed
aside when business is going well A supplier with an exclusivity agreement
can for example end up in a difficult situation if the buyer suddenly cuts
back production and purchases fewer components This is especially true if
the supplier has acquired specialized production tooling that cannot
immediately be used for other orders and buyers Conversely a buyer can
face difficulties if a major supplier ceases to deliver (bankruptcy fire strike
etc) Such risks and possible financial consequences must be thought
through from the outset and perhaps regulated by contract
Dissolution As in interpersonal relationships business relations can also
suffer tension and result in irreconcilable differences Make sure to lay down
in detail under which conditions a partner can withdraw from a partnership
When working on your business plan it is not too early to begin thinking about whom you may
want to cooperate with and what form this may take Partnerships will allow a young company
to benefit from the strengths of established companies and focus on developing their own
strengths Through partnerships you can usually grow faster than you could on your own
KEY QUESTIONS Business system and organization
Phase 2
What does the business system for your productservice look like
What activities do you want to handle yourself
Where will the focus of your own activities lie
What business functions make up your organization and how is it structured
What resources do you need (quantitative and qualitative) to create your
productservice
How high is your need for technical input (raw materials materials to create
your service)
What will you make what will you buy
Which partners will you work with What are the advantages of working
together for you and your partners
Phase 3
Where will you locate your business
36
What capacity for product manufacture and service production do you plan
(number of units)
How much will production and delivery of your productservice cost
How and at what cost can you adjust your capacity in the short term
What measures are planned for quality assurance
If you need a warehouse how will you organize your inventory
How much of your product has to be put in storage
How are your costs structured (fixed variable)
47 Implementation schedule
Business is like chess To be successful
you must anticipate several moves in advance
William A Sahlmann Professor
Investors want to know how you envision the development of your business A realistic 5year
plan will inspire credibility among investors and business partners Moreover it will help you
think through your various activities and interdependencies You will endanger your business
if you attempt to reach your targets with faulty and above all overly optimistic planning
Drawing up your implementation schedule
Concentrate on the most major milestones and the most important interdependent events The
following three elements will usually suffice
Gantt implementation schedule (for a sample Gantt timeline see CityScape
case study)
Major milestones
Important connections and interdependencies between the work assignment
groupings
Human resources planning
As your new business takes off systematic personnel planning will become more and more
indispensable Growth will require you to recruit new employees who will have to be trained
and integrated into the business Maintaining a simply structured working environment will
help you draw up clear job descriptions and seek just the right employees Keep in mind that a
qualified specialized workforce may be difficult to find even in times of high unemployment
You will often not be able to avoid stealing good employees from competitors
Include costs in your personnel planning in order to arrive at the total cost of human resources
(wages and indirect labor costs) for the income statement in your business plan The cost of
personnel depends on a number of factors such as the industry itself employee qualifications
and age Additionally indirect labor costs can amount to over 50 of the wage
37
Investment and depreciation planning
Investment and depreciation planning includes all investments that may be capitalized and the
corresponding writeoffs The amount of depreciation depends on the service life planned for
the property Usually property is written off in full over 4 to 10 years in equal annual amounts
(straightline method) Investments are to be included in the liquidity calculation and the total
amount of annual writeoffs listed in the planned income statement
KEY QUESTIONS Implementation schedule
Phase 3
What are the most important milestones for the development of your business
and when must they be reached
How do you plan to structure the work to reach these targets
Which tasks and milestones are interdependent
For which tasksmilestones do you anticipate bottlenecks
How many new employees will you need in the individual business areas
over the next 5 years What will this cost
How much real capital is necessary to achieve initial sales
List your planned shortterm investments
List your planned longerterm (3 to 5 years) investments
What investments will be required when which milestones are reached
How high is the annual depreciation for each investment
38
48 Opportunities and risks
One of the greatest myths about entrepreneurs is that
they are all risk seekers All sane people want to avoid risk
William A Sahlmann Professor
The object of this exercise is to identify a margin of error for departures from your assumptions
If possible with reasonable effort it is advisable to draw up bestcase and worstcase scenarios
involving key parameters to identify the opportunities and risks These calculations will allow
venture capitalists to judge how realistic your plans are and to better assess the risk of their
investment
Change various parameters in the scenarios (such as price or sales volumes) to simulate how a
change in conditions might affect your key figures (sensitivity analysis)
KEY QUESTIONS Opportunities and risks
Phase 2
What basic risks (market competition technology) does your business venture
face
What measures will you take to counter these risks
What extraordinary opportunitiesbusiness possibilities do you see for your
company
How could an expansion of your capital base help
Phase 3
What will your planning look like for the next 5 financial years under both a best
and worst case scenario
What effect will this have on your need for capital and your return
In your view how realistic are these scenarios
What consequences do they have on your business planning
49 Financial planning and financing
Planning substitutes
chaos for mistakes
Unknown
Financial planning assists you in evaluating whether your business concept will be profitable
and can be financed To this end the results of all preceding chapters must be compiled and
consolidated Projected growth in value results from the planned cash flows from your
operative business These are revealed through liquidity planning which also provides
39
information on your various financing needs In addition the profit situation of your business
can be seen in the income statement This statement is also necessary according to commercial
and tax law There are many ways to present the figures The appendix contains sample tables
of how to perform liquidity planning and make up an income statement as well as a balance
sheet
Minimum required of financial planning in your business plan
A cash flow calculation (liquidity planning) income statement balance sheet
Forecasts over 3 to 5 years at least 1 year beyond the point of breaking even
that is beyond the generation of positive cash flow
Detailed financial planning for the first 2 years (monthly or quarterly)
thereafter annually
All figures must be based on reasonable assumptions (only the main
assumptions need to be described in the plan)
Planned income statement
Whether a company＇s assets grow or diminish depends on the bottom line at the end of a year
The income statement can help you forecast this In contrast to liquidity planning ( planned
cash flow) an income statement focuses on the issue of whether transactions lead to an increase
( revenue) or a decrease ( expense) in the net worth of your business (defined as the sum of
all assets minus debt)
Go through your entire business plan and decide whether your assumptions will lead to
revenues or expenses and if so how high they will be If you are in doubt about the exact
amount of costs your business will incur gather quotes and estimates Do not forget to cover
the cost of your personal living expenses In the case of a limited liability company this would
be the salary of your general manager
List writeoffs in your investment and depreciation planning The cost of investments
themselves (ie the purchase price of the investment) is not included in the income statement
because the amount paid out does not lead to a change in the net worth of the business
Material costs comprise all expenses for raw materials auxiliaries expendable supplies and
purchased goods and services Your planned human resources expenditure includes wages and
salaries plus social security contributions and taxes and is listed under personnel costs For the
purpose of simplification the category other costs is treated as a collective item including
among other things rent insurance office supplies postage advertising and legal counsel
When assigning individual revenues and expenses strictly observe legal regulations Finally
calculate the difference between all revenue and expenses in a financial year by which you will
arrive at an annual net profitloss This will give you an overview of the operating result but it
will not give you a reliable assessment of your level of liquid funds For this you will need
liquidity planning
40
Sales of your product or service may be booked in the current financial year even though
payment does not occur until the next you will need to list the sales revenue even though the
money has not yet been deposited into your accounts The same is true for expenses The
income statement is generally planned in annual intervals To enhance the accuracy of your
planning for the first year you should make monthly forecasts and quarterly forecasts for the
second year For the third fourth and fifth years continue to make annual projections You
can make use of the tables contained in the appendix of this Guide to list the figures
Liquidity planning
Your company must have a certain amount of cash on hand at any given time in order to avoid
becoming insolvent which leads to bankruptcy that will mean the financial ruin of your
business Detailed liquidity planning should help ensure a positive cash flow The principle is
simple Receipts are compared directly to disbursements Please note that writing or receiving
an invoice does not mean that the money is already in your account or that you have paid the
bill Liquidity planning is concerned with the date of payment when the money actually comes
in or goes out Thus liquidity planning involves only those transactions that cause a change in
your cash reserves Depreciation liabilities and nonmarket output are not included
Lay out the amount and timing of all the payments you expect Your company is solvent when
the sum of its receipts is greater than the sum of its disbursements at any given time You will
have to draw on capital for those times when this planning does not cover all expenses The
sum of all these individual payments will equal the total capital required for that planning
interval
The farther you look into the future the more uncertain your planning will be Liquidity
planning should thus be carried out every month for the first year quarterly for the second year
and only annually for the third fourth and fifth years The appendix of this Guide contains
tables you can use for an exact compilation of the figures
Projected balance sheet
Venture capitalists are interested in seeing how your assets are expected to grow as represented
on a projected balance sheet Here the type and value of the assets are placed on the asset side
of the balance sheet across from the source of the capital on the liabilities side As with the
income statement there is a standard accounting format required by law for balance sheets
They are prepared at annual intervals Again the appendix of this Guide contains tables you
can use for an exact compilation of the figures
Financing needs
Liquidity planning enables you to determine the amount of capital you will need and when you
will need it but it does not indicate how these needs will be met We basically distinguish
between equity (investors have a stake in the business) and loan capital (which is borrowed
from outside sources) Select the right mix for your business from the myriad sources of
financing available to you (Exhibit 12)
You can＇t get something for nothing the saying goes and the same is true of money Your
family may ask little in return for financial assistance professional lenders are more demanding
41
Exhibit 12
SOURCES OF CAPITAL AT VARIOUS STAGES OF DEVELOPMENT
Seed phase Startup Growth Establishment
Personal savings
Family loans
Government grants
Individuals
(usiness angels
Venture capital
Mortgages
Leases
Bank loans
Stock exchange
All the management team can offer investors for their cash is a promise – not exactly a good
position from which to negotiate Nevertheless you have a good chance of being
financially successful if business goes well because professional investors also have an interest
in top performance from the team Be clear about your needs and expectations and those of
your investors
If you are seeking a longterm commitment and are satisfied with a small company you are
probably well advised to make use of family funds and loans from friends and banks You will
retain a majority shareholding but you are significantly restricting your chances for growth
If however you desire rapid expansion you will want to procure venture capital Venture
capitalists will generally expect to obtain a large share of the company You may in fact have
to relinquish the majority of the equity Professional investors however are not interested in
managing the business as long as you meet your targets even if they have the majority
shareholding They have after all invested in the management team in order to lead it to
success They will support you actively with their management skills and contribute specialty
knowledge such as legal or marketing expertise ties and contacts
A deal can be very complicated It is always advisable to contact experienced entrepreneurs
and get the expert advice of trustees tax advisors and lawyers You may also want to gather a
number of bids from various investors Do not be put off by complicated arrangements There
are usually legitimate reasons for them such as tax breaks control of the funds invested etc Be
absolutely certain however that you understand all the details of the deal
Calculating the investor＇s return
42
Exhibit 13
090 053
106
Year 0
CALCULATING THE RETURN
Millions
Year 1 Year 2
Year 3 Year 4 Year 5
0 0
2500
Series of cash flows
Discount factor
Discounted value of
cash flows at IRR of
72
100
090
058
062
034
018
020
0
011
0
007
170 Total 0
106
Investors evaluate the success of an investment by the return they get on the capital invested
As a result anticipated return should be apparent at a glance in the business plan
In the CityScape case study for example investors put a total of 25 million into the enterprise
during its first 3 years (09 11 and 05 million respectively) After 5 years and listing on
the stock exchange realistic proceeds of approximately 25 million are expected How high is
the return in this case (Exhibit 13)
From the point of view of the investor all funds contributed to a new company result first in
negative cash flows After a business breaks even positive cash flows will not immediately be
paid out in the shape of dividends but will be first used to strengthen the balance sheet Cash
will be returned to the investors at realization Because cash flows will occur over several years
they must be discounted that is calculated back to the present (interest and compound interest
calculation) The discount factors for the various years can be arrived at using the following
formula
discount factor 1
(1+r)T
whereby r the discount rate in percent and T the year in which the cash flow takes place To
calculate the return the internal rate of return (IRR) method is used The IRR is the discount
rate at which the sum of all positive and negative cash flows discounted at present results in
zero The IRR for the CityScape project example is 72 That means that the investors get an
annual return of 72 on their capital This is a reasonable return considering the risk involved
Most calculators and spreadsheets have a special IRR function with which to calculate the IRR
(in Excel this is the IRR () function) It can also be calculated by hand
43
Valuation of a company (ie working out how much a market is prepared to pay for shares
when a business goes public) is an art in itself A simple rule of thumb is that the value is six to
eight times the cash flow or net profit (after taxes) of the business in the year of initial public
offering In the case of CityScape a factor of six multiplied by the net profit in the fifth year
(42 million) was used which results in a valuation of 252 million
If you have no experience in financial planning consulting with coaches or experts (eg tax
consultants or accountants) is highly recommended In particular discuss the issues of turnover
sales and income taxes which have been simplified here with a tax advisor at one of the
competition events listed at the front of this Guide Note that most business ventures fail due to
lack of financial planning If you don＇t have someone with the necessary skills on your team
already start looking
KEY QUESTIONS Financial planning and financing
Phase 3
How will your revenues expenses and income develop
How will your cash flow develop When will you expect to break even ( sum
of all revenues greater than the sum of all expenses)
How high is your need for financing based on your liquidity planning
How much cash is needed in the worst case scenario
What assumptions underlie your financial planning
Which sources of capital are available to you to cover your financing needs
What deal are you offering potential investors
What return can investors expect
How will they realize a profit (exit options)
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