California entrepreneur Sandra Delarosa stayed up late at night to ready her business plan. The document, which she originally crafted in 1997 using a book and a sample from a friend, laid out Ms. DeLaRosa’s vision for creating a line of rash guards for female surfers, a market that had some big players with large balance sheets.
Ms. DeLaRosa, who had been in the surf apparel industry for years, was convinced that her products could make some serious money, but the bank wasn’t buying it. Ironically, the entrepreneur cited a lack of cash flow and a lack of collateral as reasons why the bank declined her $30,000-to-$50,000 micro-loan proposal.
In retrospect, Ms. DeLaRosa admits her main drive for writing a business plan for her company, Raw Skin, was to get a loan. When that backfired, she re-evaluated her plan to make sure it was in step with what she really wanted to do. "Writing a business plan makes you do your homework, and it teaches you about what you’re getting yourself into," she says.
For decades, finance experts have viewed business plans as coming in two basic flavors. Some plans are sophisticated sales documents to help the entrepreneur get capital. Like most promotion materials, these plans emphasize the positive and engage the reader. Other plans are operational documents that rely on objective data about the company and its markets.
Crafting a business plan solely as a fund-raising document worked during the 1990s boom, but that approach now meets with skepticism from investors and finance experts. Gaining credibility, naming identifiable customers interested in the product, and having a clear vision for growth are the key ingredients for a successful business plan in today’s market.
Likewise, in terms of format, gone are the days when investors threw money at high-flying entrepreneurs who wrote business plans on the back of a napkin. And despite books like next month’s "Burn Your Business Plan" (Lauson Publishing, $19.95), consultants, academics, and investors still encourage CEOs to get back to the fundamentals of plan writing. Entrepreneurs can find business plan templates online (see box, "Templates for Success") or get help through Small Business Administration (SBA) Small Business Development Centers.
CEOs who feel intimidated putting it all down on paper can utilize plan-writing software. But no program will perform the major chore of fact-gathering, warns Tyler Orion, CEO of the San Diego Regional Technology Alliance, a nonprofit that assists tech start-ups. "Five to ten years ago, the rage was business plan software, which gave paragraph-by-paragraph instructions on how to write a business plan. Those things were junk, because they didn’t force you to do your homework," Mr. Orion says. "If you don’t know enough about your business to write your thoughts down in a cohesive way, you should go get a job."
When starting to create a plan, customer research reigns supreme, says Luis Villalobos, founder of the Tech Coast Angels, a band of private-placement investors with three branches in Southern California. Mr. Villalobos, a private-placement investor since the early 1980s, points out what venture capitalists call the "Chinese syndrome" – the claim by some entrepreneurs that if they sell their product to just 1 percent of the 1 billion people in China, they will automatically have a market. He says a strategy explaining how the company will actually get those sales is more effective and realistic than claiming a certain slice of a potential market.
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