Winning Business Plan Competitions – Part II

Continuing from my post a few weeks ago, I wanted to comment on the elements of some of the strongest business plans I have seen in competitions:

Having a clear route to market: This involves identifying a tactical plan, not just a strategic plan, for how a venture will access its target markets.  This involves an understanding of the potential customer’s demographics and behavior rather than using only the market size to estimate the number of potential customers and the eventual size of the venture.

Working with a knowledgeable team of advisors and mentors: Many first-time entrepreneurs face questions about their credibility or knowledge about a particular market or aspect of business operations.  By finding industry and management veterans who are willing to share a bit of their time to help you navigate challenges, you can address concerns about how you will deal with problems that might arise.  In addition, by including a list of current advisors, you can show that you are proactive in anticipating challenges.

Making sure to have a thorough understanding of the competition, particularly how it will react to new entrants: Naming your competitors and explaining why their product is inferior to yours is not enough.  Competitors who are already on the market may have resources that allow them to engage in a price war or roll out a product similar to yours more quickly, thus undercutting your customer base.  You should also consider companies that can easily re-purpose their production or sales force into your market.  While intellectual property can offer some defense against infringing competitors, it can be prohibitively expensive to defend.

Building a profitable business model based on realistic predictions and market entry: Think about how the growth of your customer base may be influenced by the growth of your sales team and different phases of adoption of your technology by customers in addition to how much your customers would be willing to pay for your product and how many units you will sell.  Remember, also, that pricing is both an art and a science.  One of my favorite books on the topic is The Strategy and Tactics of Pricing: A Guide to Growing More Profitably by Thomas Nagle and John Hogan.

Mitigating risk: We all know that start-up ventures are risky.  By enumerating possible risk factors and briefly explaining how you plan to address them, you show that you are aware of problems that may arise and add depth to your analysis.  Often, the section on risk mitigation is included at the end of the business plan.

Winning Business Plan Competitions – Part I

Over the years, I have had the privilege of judging many business plan and idea competitions, and I was recently reflecting on the most common concerns that, if left unaddressed, are red flags for me.

Differentiation by price: Offering something similar to what already exists and expecting to compete on price is rarely a winning strategy, unless you address why your venture would have a lasting and defensible price advantage over your competition.  Do you have access to unique intellectual property?  Are you able to drive down the cost of manufacturing using a new process?  How can you ensure that your competitors won’t replicate your cost-advantage? And, if your cost advantage comes from outsourcing, will it present problems with delivery times, customs, security of intellectual property, etc.?

Budget size and allocation: I know that taking an idea to market often requires extensive resources.  However, there are some line items that are particular red flags:

• Large inventory costs – If the product is in its first run, spending a few million dollars on inventory may be premature.
• Expecting the costs to run into a few million dollars to get your prototype ready – Unless you are seeking Phase I FDA approval (at an approximate cost of $18.6M), you should examine whether you really need to raise more than $1M to get your prototype ready.
• High costs that could be outsourced – Rather than building something yourself, whether it’s machinery or channels to market, could you outsource any elements to cut costs and expedite your time to market?

Undefined target market: It’s easy to find large numbers to describe a general market.  But reciting the numbers and having a strategy for accessing the market are two very different animals.  In addition, you may need to narrow your target market according to specific characteristics so that it’s easier to reach with a clear value proposition that addresses a particular problem.  I’m always weary when I read of multi-billion dollar markets and claims that a venture will secure a 2% stake for profits of a few hundred million dollars within five years.  Accessing the market takes a lot of work.  A more plausible case would be to describe the market characteristics that make your target interested in your product, understand how much your buyers would budget for what you offer (i.e. what value do they place on your product), and describe how you intend to reach specific target customers.

No existing competition: Is there a reason there is no existing competition?  Perhaps the market is difficult to reach.  Or maybe servicing / maintenance costs are too high.  Is there a strong incumbent in the industry that can take over the market rapidly, thus preventing other smaller ventures from entering?  Are there regulatory barriers to entry?  Are there close substitutes for what you are providing?  Remember that substitute products serve a similar purpose but may not actually be the same; for example, for the purposes of writing, a pen may be a substitute for a computer.  And is there REALLY no competition?  Sometimes, a simple Google search can reveal similar products in different markets that could be rapidly re-purposed to compete with your product, provided by ventures that already enjoy the benefits of having access to means of production, inventories, systems, etc.

Unrealistic time lines: Especially if you are a full-time student, building a prototype and bringing it to market may take longer than expected.  Setting ambitious deadlines is great, but be aware that if your team is small and includes people who have additional commitments, you need to consider constraints on timing and what you can accomplish in a few months.

Addressing the above concerns would not necessarily convince me that an idea would make a great business, but it would make a stronger case as I read the plan.  In many cases, the entrepreneurs have already thought about the issues – and may even have reasonable responses – but it’s impossible to tell this from reading the executive summary or business plan.  So if you can justify any of the above red flags, please do so!