How to Write a GreatBusiness Plan

by William A. Sahlman

Harvard Business Review
Reprint 97409

Which information belongs – and which doesn’t – may surprise you.

How to Write a Greatby William A. Sahlman
Few areas of business attract as much attention
as new ventures, and few aspects of new-venture
creation attract as much attention as the businessplan. Countless books and articles in the popularpress dissect the topic. A growing number of annual
business-plan contests are springing up across theUnited States and, increasingly, in other countries.
Both graduate and undergraduate schools devote
entire courses to the subject. Indeed, judging by all
the hoopla surrounding business plans, you would
think that the only things standing between awould-be entrepreneur and spectacular success are
glossy five-color charts, a bundle of meticulouslooking spreadsheets, and a decade of month-bymonth financial projections.
William A. Sahlman is Dimitri V. d’Arbeloff Professorof Business Administration at the Harvard Business
School in Boston, Massachusetts. He has been closely
connected with more than 50 entrepreneurial ventures
as an adviser, investor, or director. He teaches a secondyear course at the Harvard Business School called “Entrepreneurial Finance,” for which he has developed morethan 100 cases and notes.

Nothing could be further from the truth. In my
experience with hundreds of entrepreneurial startups, business plans rank no higher than 2–on a scalefrom 1 to 10 – as a predictor of a new venture’s success. And sometimes, in fact, the more elaborately
crafted the document, the more likely the venture
is to, well, flop, for lack of a more euphemistic word.
What’s wrong with most business plans? The answer is relatively straightforward. Most waste toomuch ink on numbers and devote too little to theinformation that really matters to intelligent investors. As every seasoned investor knows, financial projections for a new company – especially detailed, month-by-month projections that stretchout for more than a year – are an act of imagination.
An entrepreneurial venture faces far too many
unknowns to predict revenues, let alone profits.
Moreover, few if any entrepreneurs correctly anticipate how much capital and time will be required
to accomplish their objectives. Typically, they are
wildly optimistic, padding their projections. Investors know about the padding effect and therefore
discount the figures in business plans. These ma-

Copyright © 1997 by the President and Fellows of Harvard College. All rights reserved.

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Business Plan

neuvers create a vicious circle of inaccuracy that
benefits no one.
Don’t misunderstand me: business plans should
include some numbers. But those numbers should
appear mainly in the form of a business model thatshows the entrepreneurial team has thought
through the key drivers of the venture’s success or
failure. In manufacturing, such a driver might be
the yield on a production process; in magazine publishing, the anticipated renewal rate; or in software,
the impact of using various distribution channels.
The model should also address the break-evenissue: At what level of sales does the business begin
to make a profit? And even more important, When
does cash flow turn positive? Without a doubt,
these questions deserve a few pages in any businessplan. Near the back.
What goes at the front? What information does agood business plan contain?
If you want to speak the language of investors –and also make sure you have asked yourself theright questions before setting out on the mostdaunting journey of a businessperson’s career–I recHARVARD BUSINESS REVIEW

July-August 1997

ommend basing your business plan on the framework that follows. It does not provide the kind of“winning” formula touted by some current how-tobooks and software programs for entrepreneurs.
Nor is it a guide to brain surgery. Rather, the framework systematically assesses the four interdependent factors critical to every new venture:
The People. The men and women starting andrunning the venture, as well as the outside parties
providing key services or important resources for it,
such as its lawyers, accountants, and suppliers.
The Opportunity. A profile of the business itself –what it will sell and to whom, whether the businesscan grow and how fast, what its economics are, whoand what stand in the way of success.
The Context. The big picture – the regulatoryenvironment, interest rates, demographic trends,
inflation, and the like – basically, factors that inevitably change but cannot be controlled by theentrepreneur.
Risk and Reward. An assessment of everythingthat can go wrong and right, and a discussion of
how the entrepreneurial team can respond.
99he accompanying article talks mainly aboutbusiness plans in a familiar context, as a tool for
entrepreneurs. But quite often, start-ups arelaunched within established companies. Do thosenew ventures require business plans? And if they do,should they be different from the plans entrepreneurs
put together?
The answer to the first question is an emphatic yes;
the answer to the second, an equally emphatic no. All
new ventures – whether they are funded by venture
capitalists or, as is the case with intrapreneurial businesses, by shareholders – need to pass the same acidtests. After all, the marketplace does not differentiate
between products or services based on who is pouring money into them behind the scenes.
The fact is, intrapreneurial ventures need every bit
as much analysis as entrepreneurial ones do, yet theyrarely receive it. Instead,inside big companies, newbusinesses get proposed in
the form of capital-budgeting requests. These facelessdocuments are subject todetailed financial scrutiny
and a consensus-building
process, as the project wends its way through thechain of command, what I call the “neutron bomb”
model of project governance. However, in the historyof such proposals, a plan never has been submitted
that did not promise returns in excess of corporate
hurdle rates. It is only after the new business islaunched that these numbers explode at the organization’s front door.
That problem could be avoided in large part if
intrapreneurial ventures followed the guidelines set

out in the accompanying article. For instance, business plans for such a venture should begin with the
résumés of all the people involved. What has theteam done in the past that would suggest it would be
successful in the future, and so on? In addition, thenew venture’s product or service should be fully analyzed in terms of its opportunity and context. Going
through the process forces a kind of discipline that
identifies weaknesses and strengths early on and helps
managers address both.
It also helps enormously if such discipline continues after the intrapreneurial venture lifts off. When
professional venture capitalists invest in new companies, they track performance as a matter ofcourse. But in large companies, scrutiny of a new venture is often inconsistent.
That shouldn’t or needn’t
be the case. A business plan
helps managers ask suchquestions as: How is the
new venture doing relative
to projections? What decisions has the team made in
response to new information? Have changes in thecontext made additional
funding necessary? How
could the team have predicted those changes? Suchquestions not only keep a new venture runningsmoothly but also help an organization learn from its
mistakes and triumphs.
Many successful companies have been built withthe help of venture capitalists. Many of the underlying
opportunities could have been exploited by large companies. Why weren’t they? Perhaps useful lessons canbe learned by studying the world of independent ventures, one lesson being: Write a great business plan.

The assumption behind the framework is that
great businesses have attributes that are easy toidentify but hard to assemble. They have an experienced, energetic managerial team from the top to
the bottom. The team’s members have skills andexperiences directly relevant to the opportunity
they are pursuing. Ideally, they will have worked
successfully together in the past. The opportunity
has an attractive, sustainable business model; it ispossible to create a competitive edge and defend it.
Many options exist for expanding the scale andscope of the business, and these options are uniqueto the enterprise and its team. Value can be extracted from the business in a number of ways either

through a positive harvest event – a sale – or by scaling down or liquidating. The context is favorablewith respect to both the regulatory and the macroeconomic environments. Risk is understood, andthe team has considered ways to mitigate the impact of difficult events. In short, great businesses
have the four parts of the framework completely
covered. If only reality were so neat.

T

BUSINESS
PLANS:FOR
ENTREPRENEURSONLY ?

100

The People
When I receive a business plan, I always read the
résumé section first. Not because the people part of
the new venture is the most important, but because
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BUSINESS PLAN

without the right team, none of the other parts really matters.
I read the résumés of the venture’s team with alist of questions in mind. (See the insert “Who Are
These People, Anyway?”) All these questions get atthe same three issues about the venture’s teammembers: What do they know? Whom do theyknow? and How well are they known?
What and whom they know are matters of insightand experience. How familiar are the team members with industry players and dynamics? Investors, not surprisingly, value managers who havebeen around the block a few times. A business planshould candidly describe each team member’s
knowledge of the new venture’s type of product orservice; its production processes; and the market itself, from competitors to customers. It also helps toindicate whether the team members have worked
together before. Not played – as in roomed together
in college – but worked.
Investors also look favorably on a team that is
known because the real world often prefers not todeal with start-ups. They’re too unpredictable.
That changes, however, when the new company is
run by people well known to suppliers, customers,
and employees. Their enterprise may be brand new,
but they aren’t. The surprise element of working
with a start-up is somewhat ameliorated.
Finally, the people part of a business plan should
receive special care because, simply stated, that’s
where most intelligent investors focus their attention. A typical professional venture-capital firm re-

Who Are These People, Anyway?
Fourteen “Personal” Questions Every Business
Plan Should Answer
M Where are the founders from?
M Where have they been educated?
M Where have they worked – and for whom?
M What have they accomplished – professionally andpersonally – in the past?
M What is their reputation within the business community?
M What experience do they have that is directly relevantto the opportunity they are pursuing?
M What skills, abilities, and knowledge do they have?
M How realistic are they about the venture’s chances for

success and the tribulations it will face?
M Who else needs to be on the team?
M Are they prepared to recruit high-quality people?
M How will they respond to adversity?
M Do they have the mettle to make the inevitable hard

choices that have to be made?
M How committed are they to this venture?
M What are their motivations?

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ceives approximately 2,000 business plans per year.
These plans are filled with tantalizing ideas for new
products and services that will change the world
and reap billions in the process – or so they say. But
the fact is, most venture capitalists believe thatideas are a dime a dozen: only execution skills
count. As Arthur Rock, a venture capital legend associated with the formation of such companies as
Apple, Intel, and Teledyne, states, “I invest in people, not ideas.” Rock also has said, “If you can findgood people, if they’re wrong about the product,
they’ll make a switch, so what good is it to understand the product that they’re talking about in thefirst place?”
Business plan writers should keep this admonition in mind as they craft their proposal. Talk about
the people – exhaustively. And if there is nothingsolid about their experience and abilities to herald,then the entrepreneurial team should think again
about launching the venture.

The Opportunity
When it comes to the opportunity itself, a goodbusiness plan begins by focusing on two questions:
Is the total market for the venture’s product or service large, rapidly growing, or both? Is the industry
now, or can it become, structurally attractive? Entrepreneurs and investors look for large or rapidly
growing markets mainly because it is often easier
to obtain a share of a growing market than to fightwith entrenched competitors for a share of a matureor stagnant market. Smart investors, in fact, try
hard to identify high-growth-potential markets early in their evolution: that’s where the big payoffs
are. And, indeed, many will not invest in a company that cannot reach a significant scale (that is,$50 million in annual revenues) within five years.
As for attractiveness, investors are obviously
looking for markets that actually allow businesses
to make some money. But that’s not the no-brainer
it seems. In the late 1970s, the computer disk-drive
business looked very attractive. The technology
was new and exciting. Dozens of companies jumped
into the fray, aided by an army of professional
investors. Twenty years later, however, the thrill
is gone for managers and investors alike. Disk drive
companies must design products to meet the perceived needs of original equipment manufacturers (OEMs) and end users. Selling a product toOEMs is complicated. The customers are large relative to most of their suppliers. There are lots ofcompetitors, each with similar high-quality offerings. Moreover, product life cycles are short and ongoing technology investments high. The industry is
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The Opportunity of a Lifetime –or Is It?
Nine Questions About the Business Every Business
Plan Should Answer
M Who is the new venture’s customer?
M How does the customer make decisions about buying

this product or service?
M To what degree is the product or service a compellingpurchase for the customer?
M How will the product or service be priced?
M How will the venture reach all the identified customer

segments?
M How much does it cost (in time and resources) toacquire a customer?
M How much does it cost to produce and deliver the

product or service?
M How much does it cost to support a customer?
M How easy is it to retain a customer?

subject to major shifts in technology and customer
needs. Intense rivalry leads to lower prices and,hence, lower margins. In short, the disk drive industry is simply not set up to make people a lot ofmoney; it’s a structural disaster area.
The information services industry, by contrast, isparadise. Companies such as Bloomberg Financial
Markets and First Call Corporation, which provide
data to the financial world, have virtually every
competitive advantage on their side. First, they canassemble or create proprietary content – content
that, by the way, is like life’s blood to thousandsof money managers and stock analysts aroundthe world. And although it is often expensive to develop the service and to acquire initial customers,
once up and running, these companies can deliver

Thus, the first step for entrepreneurs is to makesure they are entering an industry that is large
and/or growing, and one that’s structurally attractive. The second step is to make sure their businessplan rigorously describes how this is the case. And
if it isn’t the case, their business plan needs to specify how the venture will still manage to makeenough of a profit that investors (or potential employees or suppliers, for that matter) will want toparticipate.
Once it examines the new venture’s industry, abusiness plan must describe in detail how the company will build and launch its product or service
into the marketplace. Again, a series of questions
should guide the discussion. (See the insert “TheOpportunity of a Lifetime – or Is It?”)
Often the answers to these questions reveal afatal flaw in the business. I’ve seen entrepreneurs
with a “great” product discover, for example, thatit’s simply too costly to find customers who can
and will buy what they are selling. Economically
viable access to customers is the key to business,
yet many entrepreneurs take the Field of Dreams
approach to this notion: build it, and they will
come. That strategy works in the movies but is notvery sensible in the real world.
It is not always easy to answer questions about
the likely consumer response to new products orservices. The market is as fickle as it is unpredictable. (Who would have guessed that plug-in
room deodorizers would sell?) One entrepreneur
I know proposed to introduce an electronic newsclipping service. He made his pitch to a prospective
venture-capital investor who rejected the plan, stating, “I just don’t think the dogs will eat the dog
food.” Later, when the entrepreneur’s company
went public, he sent the venture capitalist an anonymous package containing an empty
can of dog food and a copy of his
prospectus. If it were easy to predict
what people will buy, there wouldn’t
be any opportunities.
Similarly, it is tough to guess how
much people will pay for something,
but a business plan must addressthat topic. Sometimes, the dogs will
eat the dog food, but only at a priceless than cost. Investors always lookfor opportunities for value pricing – that is, markets
in which the costs to produce the product are low,
but consumers will still pay a lot for it. No one isdying to invest in a company when margins are
skinny. Still, there is money to be made in inexpensive products and services – even in commodities. A
business plan must demonstrate that careful con-

The market is as fickle as it isunpredictable. Who would haveguessed that plug-in room
deodorizers would sell?
content to customers very cheaply. Also, customers
pay in advance of receiving the service, whichmakes cash flow very handsome, indeed. In short,the structure of the information services industry
is beyond attractive: it’s gorgeous. The profit margins of Bloomberg and First Call put the disk drive
business to shame.
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BUSINESS PLAN

sideration has been given to the new venture’s pricing scheme.
The list of questions about the new venture’s opportunity focuses on the direct revenues and thecosts of producing and marketing a product. That’s
fine, as far as it goes. A sensible proposal, however,also involves assessing the business model from aperspective that takes into account the investment
required – that is, the balance sheet side of the equation. The following questions should also be addressed so that investors can understand the cash
flow implications of pursuing an opportunity:
M When does the business have to buy resources,
such as supplies, raw materials, and people?
M When does the business have to pay for them?
M How long does it take to acquire a customer?
M How long before the customer
sends the business a check?
M How much capital equipment isrequired to support a dollar of sales?
Investors, of course, are looking
for businesses in which management
can buy low, sell high, collect early,
and pay late. The business planneeds to spell out how close to that
ideal the new venture is expected to come. Even if
the answer is “not very” – and it usually is – at least
the truth is out there to discuss.
The opportunity section of a business plan mustalso bring a few other issues to the surface. First, it
must demonstrate and analyze how an opportunity
can grow – in other words, how the new venture can
expand its range of products or services, customer
base, or geographic scope. Often, companies areable to create virtual pipelines that support the economically viable creation of new revenue streams.
In the publishing business, for example, Inc. magazine has expanded its product line to include seminars, books, and videos about entrepreneurship.
Similarly, building on the success of its personalfinance software program Quicken, Intuit now sells
software for electronic banking, small-business accounting, and tax preparation, as well as personalprinting supplies and on-line information services –to name just a few of its highly profitable ancillaryspin-offs.
Now, lots of business plans runneth over on thesubject of the new venture’s potential for growthand expansion. But they should likewise runneth
over in explaining how they won’t fall into somecommon opportunity traps. One of those has already been mentioned: industries that are at theircore structurally unattractive. But there are others.
The world of invention, for example, is fraught
with danger. Over the past 15 years, I have seenscores of individuals who have devised a better
mousetrap – newfangled creations from inflatablepillows for use on airplanes to automated car-parking systems. Few of these idea-driven companies
have really taken off, however. I’m not entirely surewhy. Sometimes, the inventor refuses to spend themoney required by or share the rewards sufficiently
with the business side of the company. Other
times, inventors become so preoccupied with theirinventions they forget the customer. Whatever thereason, better-mousetrap businesses have an uncanny way of malfunctioning.
Another opportunity trap that business plans –and entrepreneurs in general – need to pay attention
to is the tricky business of arbitrage. Basically, arbitrage ventures are created to take advantage ofWhatever the reason, bettermousetrap businesses have an
uncanny way of malfunctioning.

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some pricing disparity in the marketplace. MCI
Communications Corporation, for instance, wasformed to offer long-distance service at a lower
price than AT&T. Some of the industry consolidations going on today reflect a different kind of arbitrage – the ability to buy small businesses at awholesale price, roll them up together into a larger
package, and take them public at a retail price, allwithout necessarily adding value in the process.
Taking advantage of arbitrage opportunities isa viable and potentially profitable way to enter abusiness. In the final analysis, however, all arbitrage opportunities evaporate. It is not a question ofwhether, only when. The trick in these businesses
is to use the arbitrage profits to build a more enduring business model, and business plans must explain how and when that will occur.
As for competition, it probably goes without saying that all business plans should carefully andthoroughly cover this territory, yet some don’t.
That is a glaring omission. For starters, every business plan should answer the following questions
about the competition:
M Who are the new venture’s current competitors?
M What resources do they control? What are theirstrengths and weaknesses?
M How will they respond to the new venture’s decision to enter the business?
M How can the new venture respond to its competitors’ response?
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Visualizing Risk and Reward
When it comes to the matter of risk and reward ina new venture, a business plan benefits enormously
from the inclusion of two graphs. Perhaps graphs is thewrong word; these are really just schematic picturesthat illustrate the most likely relationship between
risk and reward, that is, the relationship between theopportunity and its economics. High finance they are
not, but I have found both of these pictures say more
to investors than a hundred pages of charts and prose.
The first picture depicts the amount of money needed to launch the new venture, time to positive cash
flow, and the expected magnitude of the payoff.
money

lihood of achieving them. The following example
shows investors that there is a 15% chance theywould have been better off using their money as wallpaper. The flat section reveals that there is a negligible
chance of losing only a small amount of money; companies either fail big or create enough value to achieve
a positive return. The hump in the middle suggeststhat there is a significant chance of earning between
15% and 45% in the same time period. And finally,
there is a small chance that the initial outlay of cash
will spawn a 200% internal rate of return, whichmight have occurred if you had happened to invest in
Microsoft when it was a private company.

potential
rewarddepth
of holetime to positive cash flow

probability

15%

flat
sectiontime-100%(total loss)

15%

45%

200%
(big hit)

rate of return per year

This image helps the investor understand the depth
and duration of negative cash flow, as well as the relationship between the investment and the possible return. The ideal, needless to say, is to have cash flow
early and often. But most investors are intrigued by
the picture even when the cash outflow is high andlong – as long as the cash inflow is more so.
Of course, since the world of new ventures is populated by wild-eyed optimists, you might expect the
picture to display a shallower hole and a steeper reward slope than it should. It usually does. But to behonest, even that kind of picture belongs in the business plan because it is a fair warning to investors thatthe new venture’s team is completely out of touchwith reality and should be avoided at all costs.
The second picture complements the first. It shows
investors the range of possible returns and the like-

Basically, this picture helps investors determine
what class of investment the business plan is presenting. Is the new venture drilling for North Sea oil –highly risky with potentially big payoffs – or is it
digging development wells in Texas, which happens tobe less of a geological gamble and probably lesslucrative, too? This image answers that kind of question. It’s then up to the investors to decide how muchrisk they want to live with against what kind of odds.
Again, the people who write business plans might
be inclined to skew the picture to make it look as if theprobability of a significant return is downright huge
and the possibility of loss is negligible. And, again, I
would say therein lies the picture’s beauty. What it
claims, checked against the investor’s sense of reality
and experience, should serve as a simple pictorial
caveat emptor.

M Who else might be able to observe and exploit theplan doesn’t whitewash the latter. Rather, it provesthat the entrepreneurial team knows the good, thebad, and the ugly that the venture faces ahead.

same opportunity?
M Are there ways to co-opt potential or actual competitors by forming alliances?
Business is like chess: to be successful, you must
anticipate several moves in advance. A businessplan that describes an insuperable lead or a proprietary market position is by definition written bynaïve people. That goes not just for the competition
section of the business plan but for the entire discussion of the opportunity. All opportunities havepromise; all have vulnerabilities. A good business
104

The Context
Opportunities exist in a context. At one level isthe macroeconomic environment, including thelevel of economic activity, inflation, exchange
rates, and interest rates. At another level are thewide range of government rules and regulations
that affect the opportunity and how resources are
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BUSINESS PLAN

marshaled to exploit it. Examples extend from tax
policy to the rules about raising capital for a private
or public company. And at yet another level are factors like technology that define the limits of whata business or its competitors can accomplish.
Context often has a tremendous impact on every
aspect of the entrepreneurial process, from identification of opportunity to harvest. In some cases,changes in some contextual factor create opportunity. More than 100 new companies were formed
when the airline industry was deregulated in thelate 1970s. The context for financing was also favorable, enabling new entrants like People Express
to go to the public market for capital even before
starting operations.
Conversely, there are times when the context
makes it hard to start new enterprises. The recession of the early 1990s combined with a difficult financing environment for new companies: venture
capital disbursements were low, as was the amountof capital raised in the public markets. (Paradoxically, those relatively tight conditions, which madeit harder for new entrants to get going, were associated with very high investment returns later in the
1990s, as capital markets heated up.)
Sometimes, a shift in context turns an unattractive business into an attractive one, and vice versa.
Consider the case of a packaging company someyears ago that was performing so poorly it was
about to be put on the block. Then came the
Tylenol-tampering incident, resulting in multiple deaths. The packaging company happened to have an
efficient mechanism for installing
tamper-proof seals, and in a matterof weeks its financial performance
could have been called spectacular.
Conversely, U.S. tax reforms enacted
in 1986 created havoc for companies
in the real estate business, eliminating almost every positive incentive
to invest. Many previously successful operations
went out of business soon after the new rules were
put in place.
Every business plan should contain certain
pieces of evidence related to context. First, the entrepreneurs should show a heightened awareness ofthe new venture’s context and how it helps or hinders their specific proposal. Second, and more important, they should demonstrate that they know
the venture’s context will inevitably change and describe how those changes might affect the business.
Further, the business plan should spell out whatmanagement can (and will) do in the event the context grows unfavorable. Finally, the business planshould explain the ways (if any) in which management can affect context in a positive way. For example, management might be able to have an impact on regulations or on industry standards
through lobbying efforts.

Risk and Reward
The concept that context is fluid leads directly tothe fourth leg of the framework I propose: a discussion of risk and how to manage it. I’ve come tothink of a good business plan as a snapshot of anevent in the future. That’s quite a feat to begin
with – taking a picture of the unknown. But the best
business plans go beyond that; they are like moviesof the future. They show the people, the opportunity, and the context from multiple angles. They
offer a plausible, coherent story of what lies ahead.
They unfold possibilities of action and reaction.
Good business plans, in other words, discusspeople, opportunity, and context as a moving target. All three factors (and the relationship amongthem) are likely to change over time as a company
evolves from start-up to ongoing enterprise. Therefore, any business plan worth the time it takes towrite or read needs to focus attention on the dynamic aspects of the entrepreneurial process.
Of course, the future is hard to predict. Still, it ispossible to give potential investors a sense of thekind and class of risk and reward they are assuming

One of the greatest myths about
entrepreneurs is that they arerisk seekers. All sane people
want to avoid risk.

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with a new venture. All it takes is a pencil and two
simple drawings. (See the insert “Visualizing Risk
and Reward.”) But even with these drawings, risk
is, well, risky. In reality, there are no immutable
distributions of outcomes. It is ultimately the responsibility of management to change the distribution, to increase the likelihood and consequences ofsuccess, and to decrease the likelihood and implications of problems.
One of the great myths about entrepreneurs isthat they are risk seekers. All sane people want toavoid risk. As Harvard Business School professor(and venture capitalist) Howard Stevenson says,true entrepreneurs want to capture all the reward
105

A Glossary of Business Plan Terms
What They Say…

and What They Really Mean

We conservatively project…

We read a book that said we had to be a $50 million
company in five years, and we reverse-engineered
the numbers.

We took our best guess and divided by 2.

We accidentally divided by 0.5.

We project a 10% margin.

We did not modify any of the assumptions in the businessplan template that we downloaded from the Internet.

The project is 98% complete.

To complete the remaining 2% will take as long as it took
to create the initial 98% but will cost twice as much.

Our business model is proven…

if you take the evidence from the past week for the best of
our 50 locations and extrapolate it for all the others.

We have a six-month lead.

We tried not to find out how many other people have asix-month lead.

We only need a 10% market share.

So do the other 50 entrants getting funded.

Customers are clamoring for our product.

We have not yet asked them to pay for it. Also, all of ourcurrent customers are relatives.

We are the low-cost producer.

We have not produced anything yet, but we areconfident that we will be able to.

We have no competition.

Only IBM, Microsoft, Netscape, and Sun haveannounced plans to enter the business.

Our management team has a great deal of experience…

consuming the product or service.

A select group of investors is considering the plan.

We mailed a copy of the plan to everyone in
Pratt’s Guide.

We seek a value-added investor.

We are looking for a passive, dumb-as-rocks investor.

If you invest on our terms, you will earn a 68% internalrate of return.

If everything that could ever conceivably go right does goright, you might get your money back.

and give all the risk to others. The best business is
a post office box to which people send cashier’s
checks. Yet risk is unavoidable. So what does thatmean for a business plan?
It means that the plan must unflinchingly confront the risks ahead – in terms of people, opportunity, and context. What happens if one of the new
venture’s leaders leaves? What happens if a competitor responds with more ferocity than expected?
What happens if there is a revolution in Namibia,
the source of a key raw material? What will management actually do?
106

Those are hard questions for an entrepreneur topose, especially when seeking capital. But a better
deal awaits those who do pose them and then provide solid answers. A new venture, for example,
might be highly leveraged and therefore very sensitive to interest rates. Its business plan would benefit enormously by stating that management intends
to hedge its exposure through the financial-futures
market by purchasing a contract that does wellwhen interest rates go up. That is the equivalent ofoffering investors insurance. (It also makes sense
for the business itself.)
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BUSINESS PLAN

Finally, one important area in the realm of risk/
reward management relates to harvesting. Venture
capitalists often ask if a company is “IPOable,” bywhich they mean, Can the company be taken public at some point in the future? Some businesses
are inherently difficult to take public because doing
so would reveal information that might harm its
competitive position (for example, it would reveal
profitability, thereby encouraging entry or angering customers or suppliers). Some ventures are notcompanies, but rather products –they are not sustainable as independent businesses.
Therefore, the business planshould talk candidly about the endof the process. How will the investor
eventually get money out of thebusiness, assuming it is successful,even if only marginally so? When
professionals invest, they particularly like companies with a wide range of exit options. They likecompanies that work hard to preserve and enhancethose options along the way, companies that don’t,
for example, unthinkingly form alliances with big
corporations that could someday actually buy
them. Investors feel a lot better about risk if theventure’s endgame is discussed up front. There is an
old saying, “If you don’t know where you are going,
any road will get you there.” In crafting sensible entrepreneurial strategies, just the opposite is true:
you had better know where you might end up andhave a map for getting there. A business planshould be the place where that map is drawn, for, as
every traveler knows, a journey is a lot less risky
when you have directions.

The Deal and Beyond
Once a business plan is written, of course, thegoal is to land a deal. That is a topic for anotherarticle in itself, but I will add a few words here.
When I talk to young (and old) entrepreneurs
looking to finance their ventures, they obsess about
the valuation and terms of the deal they will receive. Their explicit goal seems to be to minimize
the dilution they will suffer in raising capital. Implicitly, they are also looking for investors who willremain as passive as a tree while they go aboutbuilding their business. On the food chain of investors, it seems, doctors and dentists are best andventure capitalists are worst because of the degree
to which the latter group demands control and alarge share of the returns.
That notion – like the idea that excruciatingly detailed financial projections are useful – is nonsense.
HARVARD BUSINESS REVIEW

July-August 1997

From whom you raise capital is often more important than the terms. New ventures are inherently
risky, as I’ve noted; what can go wrong will. Whenthat happens, unsophisticated investors panic, getangry, and often refuse to advance the company
more money. Sophisticated investors, by contrast,roll up their sleeves and help the company solve its
problems. Often, they’ve had lots of experience saving sinking ships. They are typically process literate. They understand how to craft a sensible busi-

The best business is a post
office box to which people
send cashier’s checks.
ness strategy and a strong tactical plan. They know
how to recruit, compensate, and motivate teammembers. They are also familiar with the Byzantine ins and outs of going public – an event most entrepreneurs face but once in a lifetime. This kind ofknow-how is worth the money needed to buy it.
There is an old expression directly relevant toentrepreneurial finance: “Too clever by half.” Often,
deal makers get very creative, crafting all sorts of
payoff and option schemes. That usually backfires.
My experience has proven again and again that sensible deals have the following six characteristics:
M They are simple.
M They are fair.
M They emphasize trust rather than legal ties.
M They do not blow apart if actual differs slightly
from plan.
M They do not provide perverse incentives that willcause one or both parties to behave destructively.
M They are written on a pile of papers no greaterthan one-quarter inch thick.
But even these six simple rules miss an important point. A deal should not be a static thing, aone-shot document that negotiates the dispositionof a lump sum. Instead, it is incumbent upon entrepreneurs, before they go searching for funding, tothink about capital acquisition as a dynamic
process – to figure out how much money they willneed and when they will need it.
How is that accomplished? The trick is for theentrepreneurial team to treat the new venture as aseries of experiments. Before launching the wholeshow, launch a little piece of it. Convene a focus
group to test the product, build a prototype andwatch it perform, conduct a regional or local rollout
of a service. Such an exercise reveals the true eco107

BUSINESS PLAN

nomics of the business and can help enormously indetermining how much money the new venture
actually requires and in what stages. Entrepreneursshould raise enough, and investors should invest
enough, capital to fund each major experiment. Experiments, of course, can feel expensive and risky.
But I’ve seen them prevent disasters and help create
successes. I consider it a prerequisite of putting together a winning deal.

Beware the Albatross
Among the many sins committed by businessplan writers is arrogance. In today’s economy, few
ideas are truly proprietary. Moreover, there has
never been a time in recorded history when the supply of capital did not outrace the supply of opportunity. The true half-life of opportunity is decreasing
with the passage of time.
A business plan must not be an albatross that
hangs around the neck of the entrepreneurial team,dragging it into oblivion. Instead, a business plan
must be a call for action, one that recognizes management’s responsibility to fix what is broken
proactively and in real time. Risk is inevitable,

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avoiding risk impossible. Risk management is thekey, always tilting the venture in favor of reward
and away from risk.
A plan must demonstrate mastery of the entire
entrepreneurial process, from identification of opportunity to harvest. It is not a way to separate unsuspecting investors from their money by hiding
the fatal flaw. For in the final analysis, the only one
being fooled is the entrepreneur.
We live today in the golden age of entrepreneurship. Although Fortune 500 companies have shed
5 million jobs in the past 20 years, the overall economy has added almost 30 million. Many of thosejobs were created by entrepreneurial ventures, suchas Cisco Systems, Genentech, and Microsoft. Eachof those companies started with a business plan. Is
that why they succeeded? There is no knowing forsure. But there is little doubt that crafting a business plan so that it thoroughly and candidly addresses the ingredients of success – people, opportunity, context, and the risk/reward picture–is vitally
important. In the absence of a crystal ball, in fact,
a business plan built of the right information andanalysis can only be called indispensable.
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HARVARD BUSINESS REVIEW

July-August 1997