Business
plans trampled in Internet gold rush
By Kevin
Ferguson
ForbesDigital.com ©
01.05.00
The deluge of venture
capital that has generously flowed from investors in
recent months has apparently had one unfortunate side
effect: It's swept common sense from the minds of
entrepreneurs.
In their rush to get
funding, would-be captains of industry are hurriedly
cobbling together business plans that lack critical
elements. As never before, they are omitting such basic
things as the names of their competitors, the background
of their management team and their proposed channels of
distribution.
Why the poor
communication? Many of the recent startups are dot-coms,
and their Web-savvy founders often lack critical
business exposure. As a result, they don't speak the
same language as their cash-rich audience. Previously,
those seeking funding would delve into great detail in
30-page business plans, relating extensive details about
the management team, competition and operations.
"Now, they'll only
write a slide show and not a business plan,"
laments Jennifer Fonstad, a partner at Draper Fisher
Jurvetson, a Redwood City, Calif., venture capital firm
whose successes include Hotmail, now owned by Microsoft
(nasdaq: MSFT);
Fogdog (nasdaq: FOGD);
NetZero (nasdaq: NZRO);
and Netcentives (nasdaq: NCNT).
And often that slide show is only a few slides in
length.
Still, the
entrepreneurs come in droves, expecting to be the next
Amazon.com (nasdaq: AMZN)
or eBay (nasdaq: EBAY)
but never understanding how poor their chances are.
Draper Fisher Jurvetson, for example, has funded more
than 150 high tech companies. But the VC firm wades
through more than 10,000 business plans each year.
When the entrepreneurs
are pressed for details as to how their company would
work, they are left slackjawed. Many of them, it seems,
haven't thought through their idea. "They have good
technical backgrounds, but they don't know how to run a
business," notes Raymond Phillips, chairman of the
New York chapter of Service Corps of Retired Executives.
SCORE, which has more than 12,000 counselors nationwide,
offers such business advice for free.
So, what advice do
SCORE and other experts give? In addition to reading the
widely available literature, entrepreneurs need to
execute on three points, experts agree:
Realize when writing
a business plan that it is more than a solicitation
for money; it is a declaration of strategy that will
be used for many months to come.
Spend sufficient
time writing the biographies of the management team.
Since there is usually no company to speak of,
investors are placing their bets on people: They need
to know everything about them.
Be prepared to
defend ideas, particularly why they're better than
those of the competition.
Of these three points, the
need to write a business plan as a strategy summation
rather than as a solicitation is perhaps the most
important. Anyone can get money; not everyone can make
it. Investors are looking for entrepreneurs who can make
money. "Writing a business plan is one piece of the
puzzle. When writing the plan, you better make sure you
can back it up with great detail," warns Robert
Sullivan, founder of Information International, a
small-business consultant in Great Falls, Va. "For
a 20- or 30-page business plan, you'd better have
another 20 pages of notes."
Indeed, a good business
plan will be referred to for years to come. "People
believe they're writing a plan to raise money, but it's
a living roadmap" for how a company will operate,
says Fonstad. Although that roadmap will likely change
over time, it's essential that all managers move in the
same direction, she adds. "One of the bigger
challenges is to make sure that the whole team is on the
same page. It's really a communications document for a
team."
Just the same, the
business plan is written for potential investors. As
such, it needs to include a frank discussion of the
management team, says Sullivan. "Not saying enough
is one of the biggest mistakes. It seems like seven out
of ten people forget that the most important section,
the one that is often read the first, is the one about
the people." The company founders themselves tend
to downplay their own importance for the sake of their
products or services, usually with dire results. "I
get a lot of business plans all the time. I'll get a
30-page business plan with a one-page summary of the
three founders. Not good. I want to know why and how
these guys will make it go."
Tim Berry, president of
Palo Alto Software, publisher of business plan software,
agrees. "The most common mistake is confusing the
value of the idea with the value of the managers,"
says Berry. "The management team is critical to the
funders. The mystique of the Internet gold rush is that
it's the plan that gets the funding."
A discussion of
management is crucial, even for those sole
proprietorships that rely heavily on third-party
consultants, notes Monika Edwards Harrison, associate
administrator for business initiatives at the Small
Business Administration. "Over 17 million of
today's 24 million small businesses are sole
proprietors. Even if you have no managers to speak of,
you need to be able to say, 'Here is my brain
trust.'"
And as for the
mechanics of writing a business plan, several worthwhile
guides can be found at www.palo-alto.com
(Palo Alto
Software publishes Business Plan Pro 4.0),
www.adarus.com (Adarus Software), www.digitalwork.com
(funded by Draper Fisher Jurvetson), and www.businesstown.com.
The Small Business
Administration ( www.sba.gov
) also offers a fairly
comprehensive guide to writing a business plan. "We
think that putting together a business plan is the
single most important thing an entrepreneur can
do," says SBA's Harrison. "We all hear about
people who succeed without business plans, but they are
the exception rather than the rule."
At least for now, the
money continues to flow. But without a well-versed
business plan, entrepreneurs should forget about getting
showered with riches.
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