New Ventures (part C)
by
Charles Lamson
Planning
So you think you have spotted a business opportunity. And you have the personal potential to make it a success. Now what? Should you act on your idea? Where should you begin?
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The Business Plan Your excitement and intuition may convince you that you are on to something. But they might not convince anyone else. You will need more thorough planning and analysis. This will help convince other people to get on board, and help you avoid costly mistakes.
The first formal planning step is to do an opportunity analysis. An opportunity analysis includes a description of the product or service, an assessment of the opportunity, an assessment of the entrepreneur (you), specification of activities and resources needed to translate your idea into a viable business, and your source(s) of capital. Table 1 shows the questions you should answer in an opportunity analysis.
TABLE 1
Opportunity Analysis
The opportunity analysis, or opportunity assessment plan, focuses on the opportunity, not the entire venture. It provides the basis for making a decision on whether to act. Then, the business plan describes all the elements involved in starting the new venture. The business plan describes the venture and its market, strategies, and future directions. It often has functional plans for marketing, finance, manufacturing, and human resources.
Table 2 shows an outline for a typical business plan. The business plan (1) helps determine the viability of your enterprise; (2) guides you as you plan and organize; and (3) helps you obtain financing. It is read by potential investors, suppliers, customers, and others. Get help in writing up a sound plan!
TABLE 2
Outline of a Business Plan
Table of Contents
Key Planning Elements Most business plans devote so much attention to financial projections that they neglect other important information that matters greatly to astute investors. In fact, financial projections tend to be overly optimistic. Investors know this and discount the figures. In addition to the numbers, the best plans convey---and make certain that the entrepreneurs have carefully thought through---five key factors: the people, the opportunity, the competition, the context, and risk and reward.
The people should be energetic and have skills and expertise directly relevant to the venture. For many astute investors, the people are the most important variable, more important even than the idea. Venture capital firms often receive 2,000 business plans per year. Many believe that ideas are a dime a dozen and what counts is the ability to execute. Arthur Rock, a legendary venture capitalist who helped start Intel, Teledyne, and Apple, stated, "I invest in people, not ideas. If you can find good people, if they're wrong about the product, they'll make a switch."
The opportunity should provide a competitive advantage that can be defended. Customers are the focus here. Who is the customer? How does the customer make decisions? How will the product be priced? How will the venture reach all customer segments? How much does it cost to acquire and support a customer, and to produce and deliver the product? How easy or difficult is it to retain a customer?
It is also essential to fully consider the competition. The plan must identify current competitors and their strengths and weaknesses, predict how they will respond to the new venture, indicate how the new venture will respond to the competitors responses, identify the future competitors, and consider how to collaborate with actual or potential competitors. Thus, for example, Andrew Busey created ichat, which became the leading provider of software for chat rooms. But then, America Online and Microsoft started competing directly with the young entrepreneur. Busey responded by collaborating with IBM; the Lotus division bundled ichat's software with its Internet-ready version of Notes.
The environmental context should be a favorable one from regulatory and economic perspectives. Such factors as tax policies, rules about raising capital, interest rates, inflation, and exchange rates will affect the viability of the new venture. The context can make it easier or harder to get backing and to succeed. Importantly, the plan should make clear that you know the context inevitably will change, how the changes will affect the business, and how you will deal with the changes. 
The risk must be understood and addressed as fully as possible. The future is always uncertain, and the elements described in the plan will change over time. Although you cannot predict the future, you must contemplate head-on the possibilities of key people leaving, interest rates changing, a key customer leaving, or a powerful competitor responding ferociously. Then describe what you will do to prevent, avoid, or cope with such possibilities. You should also speak to the end of the process: how to get money out of the business eventually. Will you go public? Will you sell or liquidate? What are the various possibilities for investors to realize their ultimate gains?
Selling the Plan Once you have written your plan, your goal is to get investors to agree. The elements of a great plan, as just described, are essential. Also important is whom you decide to try to convince you back your plan.
Many entrepreneurs want passive investors who will give them money and let them do what they want. Doctors and dentists generally fit this image. Professional venture capitalists do not, as they demand more control and more of the returns. But when business goes wrong---and chances are, it will---nonprofessional investors are less helpful, and less likely to advance more needed money. Sophisticated investors have seen sinking ships before and know how to help. They are more likely to solve problems, provide more money, and also navigate financial and legal waters such as going public.
View the plan as a way for you to figure out how to reduce risk and maximize reward, and to convince others that you understand the entire new venture process. Don't put together a plan built on naivete or overconfidence or one that cleverly hides major flaws. You might not fool others, and you certainly would be fooling yourself.
Nonfinancial Resources Also crucial to the success of a new business are nonfinancial resources---particularly other people.
Networks The entrepreneur is aided greatly by having a network of people. Social capital---being part of a social network, and having a good reputation---helps entrepreneurs gain access to useful information, gain trust and cooperation from others, recruit employees, form successful business alliances, receive funding from venture capitalists, and become more successful. Networks are so important that Regis McKenna of the McKenna Group says that how well-connected your investors are is more important than how much they invest. Similarly, Andrea Williams of E'Offering Group advises that you sign up with investors with the best track records, because they can open doors for you.
Top Management Teams The top management team is another crucial resource. The board of directors improves the company's image, develops longer-term plans for expansion, supports day-to-day activities, and develops a network of information sources. Michael Dell, founder of Dell computer at age 19, knows the importance of surrounding himself with talent. He hired managers who were far more experienced than he, and prominent and powerful board members. By 1995, at age 30, Michael Dell held the longest tenure of any chief executive in the industry.
Advisory Boards Anita Bratina thought after two or three years of running her own marketing firm she would have lots of cash, no debt, and time to enjoy her independence. Eight years later, she still worked 50 to 60 hours a week and was not making much money. So she got an advisory board. Board members taught her how to do cash flow analysis, suggested some strategic changes, and encouraged her to cultivate relationships with a banker, an accountant, and an attorney. In addition, they helped her interview salespeople, develop a long-term marketing strategy, and reorganize operations. They also vetoed a number of her ideas. Sales went up, after one year of listening to the board and implementing its ideas.
Partners Often, two people go into business together as partners. Partners can help one another access capital, spread the workload, share the risk, and furnish expertise.
Despite the potential advantages of finding a compatible partner, partnerships are not always marriages made in heaven.
"Mark" talked to three of his friends into joining him in starting his own telecommunications company because he didn't want to try it alone. He learned quickly that while he wanted to put money into growing the business, his three partners wanted the company to pay for their cars and meetings in the Bahamas. The company collapsed. "I never thought a business relationship could overpower friendship, but this one did. Where money's involved, people change."
To be successful, Partners need to acknowledge one another's talents, let each other do what he or she does best, communicate honestly, and listen to one another. And they must learn to trust each other by making and keeping agreements. If they must break an agreement, it is crucial that they give early notice and clean up after their mistakes. 
Entrepreneurial Hazards
Not all companies get off to a great start. Some die a quick death. Others a slow, agonizing one. Even those that make honored lists, like the Forbes best small companies or Inc.'s hottest growth companies, don't always remain on the fast track. Some flame out. Of course, many dot-coms have followed this pattern.
A common cause of trouble is growth into new products, or new geographic areas, that are poorly understood. Success can cause management to become overconfident or complacent. And growth can be so fast that the company goes out of control and isn't managed properly, resulting in lower quality goods and services. A very low percentage hit the middle ground of continuing to grow, but slowly.
The hazards of entrepreneurship are many. First you may start your own company and find out that you don't enjoy it. One person who quit a large company to start his own small one stated, "As an executive at a large company, the issues are strategic. You're implementing programs that affect thousands of people. In a small business, the issues are less complex . . . you worry about inventory every day, because you may not be in business next week if you have negative cash flow." His most unpleasant surprise how much you have to sell. "You're always out selling I don't want to be a salesman. I wanted to be an executive."
And survival is difficult. as Fortune put it, "Misjudgments are punished ruthlessly. When competition gets tougher, small business feels it first. Financing is hard to find, sometimes impossible . . . 'In small business there are no small mistakes'---it's a phrase that comes up time and again when you talk to the owners." But, says Fortune, most are proud of this description of entrepreneurial hazards.
Failure can be traced to several hazards the most common are mortality, the inability to delegate, misuse of funds, and poor planning and controls.
Mortality One long-term measure of an entrepreneur's success is the fate of the venture after the founders death. The organization can outlive the entrepreneur under one of two conditions: (1) if the company has gone public, or (2) if the entrepreneur has planned an orderly succession, usually to a family member. Both conditions are relatively rare.
Entrepreneurs often fail to seek public capital if equity capital is scarce and expensive or because they want to maintain control. An entrepreneur who is funded with public equity risks losing the business if stockholders are not satisfied. To avoid the risk, the entrepreneur maintains private control over the business. But founding entrepreneurs often fail to plan for succession. When death occurs, estate tax problems and/or the lack of the skilled replacement for the founder can lead to business failure.
The late but great management guru Peter Drucker offered the following advice to help family managed businesses survive and prosper. Family members working in the business must be at least as capable and hardworking as other employees. At least one key position should be filled by a non-family member and someone outside the family and the business should help plan succession. Family members who are mediocre performers are resented by others. Outsiders can be more objective and contribute expertise the family might not have; and issues of management succession are often the most difficult of all, causing serious conflict and possible break-up of the firm.
Inadequate Delegation Although mortality contributes to some new venture failures, the founders death usually cannot be blamed. Most new businesses collapse before their owners do. In these cases, the cause of the demise often can be traced to the entrepreneurs desire to personally control every aspect of the business.
Just as entrepreneurs resist loss of control of the company to either public investors or heirs, they often hesitate to delegate work to people within the business. Active leadership deteriorates into micromanagement, in which managers monitor too strictly, to the minutest detail. For example, during the Internet craze many company founders with great technical knowledge but little experience became instant experts in every phase of business, including branding and advertising. Turns out, they didn't know as much as they thought.
Misuse of Funds Many successful entrepreneurs blame their failure on inadequate financial resources. Yet failure due to a lack of financial resources does not necessarily indicate a real lack of money. It could mean a failure to properly use the money available. Entrepreneurs who fail to use their resources wisely usually make one of two mistakes: They apply financial resources to the wrong uses, or they maintain an adequate control over their resources.
One aspiring entrepreneur borrowed $100,000 and used $25,000 of that money to buy a dating service. He then used the remaining $75,000 to buy radio advertising for the business. A few months later, bankrupt and bitter, he blamed his failure on a lack of financial resources. But a more objective view might reveal that he did not use his resources wisely. In this case, he would have entered the business at a lower cost by starting his own operation. In addition, he should not have spent $75,000 on advertising without specific knowledge about how that advertising would affect his business. The entrepreneur failed because he applied his financial resources to the wrong uses.
Pew Planning and Controls Entrepreneurs, in part because they are very busy, often fail to use formal planning and control systems. Planning takes time from activities that entrepreneurs may find more enjoyable, such as selling, producing, and buying. Many entrepreneurs fail because they did not anticipate problems such as cash flow shortages and the loss of key customers.
One common entrepreneur malady is an aversion to record keeping. Expenses mount, but records do not keep pace. Pricing decisions are based on intuition without adequate reference to cost. As a result, the company earns inadequate margins to support growth.
Internet start-ups' ability to burn a through cash was stunning; their managers seemed to have a disdain for traditional management control. True, implementing their business models was expensive, but the seemingly limitless availability of funds and the lack of pressure for profits created a lack of discipline.
Even in high-growth companies, great numbers can mask brewing problems. Blinded by the light of growing sales, many entrepreneurs fail to maintain vigilance over other aspects of the business. In the absence of controls, the business veers out of control. As the Chief Financial Officer of FTP Software put it, "Success is the worst thing that can happen to a company. You start believing your own headlines. You get sloppy."
Michael Dell observes that people who are too intent on spending money "forget where the fundamentals are in terms of customers and creating value and being disciplined with capital, and you get pretty horrific results." So don't get overconfident, keep asking critical questions. Is our success based on just one big customer? Is our product just a fad that can fade away? Can companies easily enter our domain and hurt our business? Are we losing our technology lead? Do we really understand the numbers, know where they come from, and have any hidden causes for concern?
Global Startups
Most people, particularly Americans, have an image of new ventures beginning domestically and then slowly, over time, evolving toward International operations. But another model is the global start-up, a new venture that is international from the very beginning.
If you are contemplating a start-up, you should ask the following questions to determine whether you should begin with a domestic or a global outlook: First, where are the best people? The United States has great software designers; Italy is known for fine leathers; Japan, for its manufacturing quality. Are the world class people you need to make the venture a great success located in the neighborhood, or on the other side of the world?
Second, where is the financing easiest and most suitable? Some entrepreneurs maintain that courting European investors is more productive than approaching U.S. venture capitalists, who have made the investment process less intuitive and more institutionalized and bureaucratic. Third, where are the targeted customers? If a big percentage is abroad, it may be a logical to limit operations domestically.
Fourth, when global operators learn about your adventure, will they go head-to-head with you? If so, how quickly? Instead of having to defend your domestic markets, you might be better served by going on the offensive internationally. Fifth, if you postpone going International, will your domestic inertia cripple your longer-term prospects? Strategies and tactics that succeed domestically will not necessarily work internationally, and can interfere when you try to adapt new approaches. Why not learn now about going global, rather than later when you could be too slow and too late?
So, you've decided to begin globally rather than just domestically? You better know the critical success factors for global startups. You should think globally from day one, and be able to communicate your global vision to everyone else associated with the venture. Your top management team should have international experience, and with your staff you should develop cross-cultural understanding. You and your team should have in place a network of trusted financiers, suppliers, distributors, and other business associates. You must have a product, good, or service that provides a clear advantage to customers, in order to overcome the advantages already held by indigenous competitors. It also helps to have other, more intangible assets, such as unique knowledge competitors lack. You should continue innovating, extending your product line over time in order to maintain or build your lead over competitors. And you should coordinate closely every aspect of the organization worldwide via teamwork, extensive travel, personal communications, a sophisticated communications infrastructure, and constant transfer of knowledge among widely dispersed locations.
*SOURCE: MANAGEMENT: THE NEW COMPETITIVE LANDSCAPE, 6TH ED., 2004,PGS. 222-228*
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