Have you ever wondered the prudence of a VC asking a start-up founder for a five-year (or even a three-year) financial forecast? Creating a START-UP BUSINESS PLAN & FORECAST is like writing a newborn baby’s future graduate school transcript … in the world infested with very high infant mortality rate! Well, then here are some tips that to do precisely that:
1. Logic – not numbers: While creating a start-up business forecast, journey is more important than the destination! Ask yourselves if you have considered every driver that impacts 4 financial quadrants – revenue, costs, assets, and liabilities. Test the underlying logic while projecting the famous (notorious) J-curve. Don’t forget to factor in all required costs and capital expenditure required to achieve those fabulous revenue projections! Accuracy of logic is more important than the precision of numbers!
2. Decide on a single business trajectory: Do not forecast every possible trajectory that your business can possibly take. Decide on a clear focus and chart out a business forecast for only those activities that you would undertake in initial years. Do you want to build a product business or a service business, will you be a wholesaler or a retailer, will you sell directly or through distributors, etc. Decide on the dominant path and model that path alone.
3. Address break-even and scalability: Readers of a start-up business plan look for guidance about the economic promise and risks that the venture offers. Understanding regarding entrepreneur’s plan to reach self-sustainable state (a financial break-even) is a key risk measure. How many months would a start-up take to break even, what are the management’s plans to make that happen, and how much fuel will it burn to reach that stage are the key questions that readers would seek answers to. Once they are comfortable with the answers that the plan provides, the next question would address the potential upside offered by the venture and that depends on how fast the venture can scale its revenue model?
4. Err on the “negative side”: It is OK to have ultimately overestimated your cash needs. In fact, it is better to do so rather than showing a Supercalifragilisticexpialidocious forecast to please potential investors, only to run out of money before achieving targeted milestones. In later case, the entrepreneur invariably ends up losing his or her company! This business forecast is about planning your business and not about convincing the investors.
5. Market is not a “thing” … it is a live beast!: Recently, I met an entrepreneur who was advised by some pundit to price his offering in a manner that will result in super-normal gross margin to attract investments. I am not sure how many investors would buy such a pricing scheme. First, such pricing is possible only in a monopolistic situation and monopolies are rear to find now a days. But even if sit was feasible in short-run (say, due to the product being of unique value), it is naïve to believe that no competitor will ever chase such attractive business proposition in long run. Never think of competition as a static force. It is a live beast that will react to your decisions!
6. Make customers the focal point of your plan: If you can convince a customer to buy your product, you can convince an investor to invest in your business. A business plan that is built on the basis of an early engagement with “anchor customers” becomes way more defensible than one built on theoretical assumptions.
7. Do not turn your sail with every breeze: Business forecast is the entrepreneur’s plan … not of a prospective investor. One should, of course, take all relevant inputs from experts (especially, from other entrepreneurs who have ‘been there, done that’) before you finalize the business plan. However, once you freeze it, do not keep modifying it with every suggestion that you may receive. Revisions should be well thought-out and done only to reflect strategic changes in direction of your venture.
The Big Lie of Strategic Planning by Roger L. Martin in Harvard Business Review (may require registration for full access)
“Focus your energy on the key choices that influence revenue decision makers—that is, customers. They will decide to spend their money with your company if your value proposition is superior to competitors’. Two choices determine success: the where-to-play decision (which specific customers to target) and the how-to-win decision (how to create a compelling value proposition for those customers).”
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