lanning is important. But results are what count. And who delivers the results? Entrepreneurs. Entrepreneurs like you can change the world.
Why, then, is there so much fascination with business plans (and pitches and canvasses and all the rest) in today’s entrepreneurship community? Why do investors ask to see them? Why are there software packages to automate the business planning process? Why do so many accelerators focus on pitching again and again?
The Problem and a Solution
Unfortunately, it is clear that the vast majority of business plans raise no money. Of those ventures that are financed, many if not most will fail.
The simple fact is that most business plans should never have been written, and most with any merit are written far too soon, before there’s any real evidence to support their assertions. So, why are so much blood, sweat and tears invested in labouring over the perfect business plan? Good question.
“Is there a solution?” you might ask. Indeed, there is. Instead of diving into business planning mode, step back and ask yourself whether the opportunity you have in mind is genuinely attractive.
That’s what an aspiring entrepreneur named Cassian Drew did before embarking on a plan to sell climbing wall hardware and exercise programmes to fitness facilities. He spent a summer examining his opportunity and, in the process, learned exactly how fitness operators assess the economics of the gear they acquire.
Alas, it quickly became clear that the economics underlying what he had thought to be a great idea just weren’t going to fly. While he and his partner were well suited to the opportunity and the market was attractive – with booming interest in both fitness and climbing in the UK – there simply wasn’t a business model that would work.
As Cassian Drew and countless numbers of entrepreneurs have learned, usually the hard way, opportunities are best understood in terms of three crucial elements: markets, industries, and the one or more key people that make up the entrepreneurial team.
The seven domains model articulated in The New Business Road Test: What Entrepreneurs and Investors Should Do Before Launching a Lean Start-Up brings these elements together to offer a clearer way to answer the crucial question that every aspiring entrepreneur must ask him or herself every single morning: “Why will or won’t my idea work?”
The model offers a better toolkit for assessing and shaping market opportunities and a better way for entrepreneurs or entrepreneurial teams to assess the adequacy of what they themselves bring to the table as individuals and as a group.
The model also provides the basis for what I call a customer-driven feasibility study that entrepreneurs, whether in nascent start-ups or deep in the bowels of an established company, might use to guide their assessments – before they invest precious time and effort in writing a business plan (see the Exhibit).
The Feasibility Study and the Business Plan: How Are They Different?
How do the seven domains model and the customer-driven feasibility study it delivers differ from what’s in a good business plan? To be sure, there is considerable overlap in the content of a customer-driven feasibility study and a business plan. And that’s actually a good thing.
In fact, all of the analyses we advocate are essential, though not sufficient, for crafting a thoughtful, evidence-based business plan or preparing a pitch. So, what’s new here? What’s different?
Customer focus: The feasibility study is focused on the customer. As Peter Drucker wrote many years ago, the purpose of any business is to win a customer.
The feasibility study hones in on that purpose, one quite different than that of most business plans and pitches – to win an investor. Without the likelihood of there being customers, there will likely be no investors.
Economic fundamentals: The feasibility study succinctly addresses the fundamental economics of the business, by identifying the key drivers of cash flow: revenue, customer acquisition and retention costs and timelines, gross margins, required capital investment, and the working capital characteristics of the operating cash cycle.
If these drivers are satisfactory, detailed strategies – for marketing, operations, and financing – can probably be developed to make the venture economically viable, provided the market, industry, and team elements are sufficiently attractive. If they are not, there’s little point in wasting time developing such strategies.
Mindset: The customer-driven feasibility study asks the critical questions necessary to satisfy the entrepreneurial team’s curiosity about the attractiveness of the opportunity itself, and makes it possible to answer these questions before developing the detailed strategy necessary for the completion of a business plan.
Thus its mindset is to ask (and answer) questions, not to sell the venture’s merit. In contrast, the business plan organizes the answers delivered by the feasibility study and goes on to develop marketing, operating, and financing strategies in an effort to sell the opportunity, in a sharply focused way, to investors and other stakeholders.
“Are these differences worth the effort?” you might ask. Why shouldn’t you, as a would-be entrepreneur, simply skip the feasibility study and proceed directly to preparing a business plan?
First, researching and preparing a customer-driven feasibility study gives you a chance to opt out early in the process, before investing your precious time and energy in preparing a plan. Thus, it can save weeks or months of time that might be wasted on a fundamentally flawed opportunity.
Second, for opportunities that do look promising, the feasibility study jump-starts the business planning process and provides a clear, customer-focused vision about why your proposed venture makes sense – from market, industry, and team perspectives, viewed independently and collectively.
It identifies the customer pain, how you’ll resolve it, and the one or two domains that make the opportunity stand out. These factors become the drivers of your business plan.
Third, by ensuring that all aspects of the opportunity are examined, your analysis reduces your risk of entering a fatally flawed venture.
No car-buyer would buy a new car without a road test, and that’s a far less risky decision than the one you are about to make. A customer-driven feasibility study is the entrepreneur’s new business road test. Entrepreneurs who proceed without one ignore it at their peril!
The Customer-Driven Feasibility Study
1. Executive summary that summarizes what follows (tell the reader(s) – you and your team – what you are going to tell them)
2. Micro-level market assessment
· Target market’s pain identified; compelling benefits of your solution identified, with evidence that those in this segment are willing to pay
· Target market segment, size, and growth rate
· Options to grow into other segments
3. Macro-level market assessment
· Overall market size and growth rate
· Macro trends analysis to assess future market growth and attractiveness
4. Macro-level industry assessment
· Five forces analysis: Is the industry attractive?
· Likely changes therein going forward
5. Micro-level industry assessment
· Proprietary elements?
· Superior organizational processes, capabilities, or resources identified, that are not easily duplicated or imitated?
· Economic viability of business model established
o Revenue forecast
o Customer acquisition and retention costs, and time required to obtain a customer
o Gross margins
o Capital investment required
o Operating cash cycle characteristics
6. Team assessment
· Team’s mission, aspirations, and propensity for risk
· Team’s ability to execute on the critical success factors in this industry
· Team’s connectedness up, down, and across the value chain
7. Summary and conclusions (tell the reader(s) the key highlights of what you’ve told them)
· Why is – or isn’t – this opportunity attractive? On what one (or at most, two) domains do you rest your case?
This piece is excerpted from John Mullins, “The New Business Road Test: What Entrepreneurs and Investors Should Do Before Launching a Lean Start-up,” London: FT/Prentice Hall, fifth edition 20107.