As an advisor to new hardware entrepreneurs, I often hear the myth that a business plan is no longer required to find an investor, if your idea is good enough.
This article is written by Marty Zwilling who is an angel investor and startup business consultant. He is also one of the experts in the Hardware Academy.
You may have heard that venture capitalists in Silicon Valley no longer read business plans. What you don’t realize is these famous investors only deal with entrepreneurs who sold their last company for a $100M dollars or more.
For the rest of us, we need a business plan, as well as a product plan. Some of you may be convinced that your product specification communicates the product message even better than a business plan, so why be redundant?
Let me assure you that a business plan and product plan are two different things. You need both to survive.
To be clear, I define a product specification as the technical definition of your product, to be used for development and testing purposes, with a quick business summary for context.
A business plan is the outward facing definition of the business you hope to drive with your hardware solution, with a hardware overview in the intro to highlight customer value and competitiveness.
You may not be familiar with the key elements of a business plan, and the way to use it correctly to support and add credibility to your hardware solution. So I offer the following outline for how to organize and present your business plan, with specific examples:
Start by outlining customer problem and your solution
Use non-fuzzy terms to quantify customer value. For example, “We just patented a new battery technology that will cut your smartphone charge time and cost in half.”
Be sure to include this in your “elevator pitch,” which you must always deliver as a prelude to your technology features.
Description of the business entity you plan to form
The most common business entity used for startups is a Limited Liability Corporation (LLC), which is the cheapest and simplest to manage.
If your goal is a large national corporation with more than 100 investors, and multiple classes of stock, you might prefer a C-Corp or S-Corp.
Quantify the market opportunity in business terms
The answer is not “if we build it, they will come.” Investors and advisors want to see recent survey data and projections from industry professionals here, not just your opinion.
For example, “Nielsen projects that the market for smart phones will double every year for the next five years.”
Highlight your advantages over three top competitors
Call out your top competitors, highlighting your sustainable competitive advantage, including patents, trade secrets, and trademarks. Don’t denigrate your competitors, but use their limits to highlight your edge.
For example, rather than saying, “Competitor X has poor reliability,” use a positive approach to list your reliability features compared to X. If possible, quantify these in non-technical business terms, such as dollars saved or replacement costs over time.
Provide specifics on the customer business model
All startups need revenue to thrive, such as from subscriptions, retail sales, online sales, licensing, or services.
Positioning your hardware solution at a low cost may sound attractive to customers, but it won’t attract investors. They want to see revenue to share in the return.
Document why your team is the best for this challenge
Be sure to highlight any special credentials or relevant experience that you or key members of the team, including advisors or existing investors, may have.
Don’t assume titles will convey this information. Professional investors and even customers invest in people, rather than just a product.
NOTE: If you are a member of the Hardware Academy you should highlight that in your business plan since it shows you are getting guidance from industry experts.
Include marketing, sales, and customer rollout plans
Don’t let your passion convince you that word-of-mouth and viral marketing will suffice against well-funded competitors and ever more demanding customers.
Set specific targets for the sales channels and marketing initiatives you need, including the use of social media, brand building, franchising, trade shows, affiliates, and distributors. Budget time and dollars for each.
Target income and expenses by year plus funding
Here I recommend a 5-year projection of revenue, expenses, and funding requirements. Major milestones along the way should be outlined.
Scale your funding requests to the value of your startup today, consisting of assets, contracts, and intellectual property you currently own. The best way to do this is to reference actual data from a recent similar startup success.
Investors look for high-growth-potential companies who can double revenues yearly, hit break-even in two or three years, and penetrate at least 10 percent of the opportunity you quantified for the first five years, to give them a 10X return on their investment.
Outline a viable exit strategy for you and investors
Investors want to know how and when they might see some return on their investment, since startups require some event to show value.
The options here include going public (IPO), merger/acquisition, liquidate, or no exit (just paying off investors). Most investors don’t want long-term commitments.
Summarize all of the above in an executive summary
Since everyone wants a quick overview of the whole plan, you need a tightly written and formatted two-page content summary, using the first paragraph of each of the above sections.
This summary is often extracted as marketing collateral, with text and graphics for pitch handouts.
Based on my experience in the investment world, aspiring entrepreneurs seeking an investment with no written business plan are routinely requested to come back later, when “you have more traction.”
Every good technologist should start with at least a single page business plan, or construct a “pitch deck” of maybe a dozen PowerPoint slides to cover all the important content.
Most of the business plans I see getting funded today are less than 30 pages in total, even including financial statement attachments.
What investors expect, and what you should be looking to provide for your own use, are answers to all the relevant questions a good advisor might ask about your business goals, objectives, structure, and milestones over time.
I personally find that writing down my business plan is a good discipline for thinking through all the issues, and doing the research on the alternatives available.
I know from experience that most investors look for written plans to separate what they call “hobbyists” from serious entrepreneurs.
If you have no idea what needs to be included in your business plan, fortunately there are many useful templates available online and books on how to write business plans are in every bookstore.
Several software applications are also available to at least partially automate this process. Part of the fun of starting a business is the learning process, and this is an easy place to start.
If all else fails, working on your business plan is a good time to ask for help from a peer entrepreneur, or follow up on a friendly relationship with someone who has been there and done that.
In fact, if you lack prior business experience this is your best opportunity to attract a co-founder who has the business skills and interests that are complementary to your strengths.
Keep in mind that multiple studies have found that entrepreneurs who create a good business plan at least double their chances of securing funding and growing a business to change the world.
Other content you may like:
- Lesson 2: The Strategic Way to Develop and Sell Your New Electronic Hardware Product
- Five Big Mistakes Hardware Startups Make: Here’s Why You Need to Talk to Your Customers
- Business Models and Recurring Revenue for Hardware Startups
- The First Critical Steps When Bringing a New Hardware Product to Market
- Lesson 1: The Strategic Way to Develop and Sell Your New Electronic Hardware Product