Every seasoned investor knows that detailed financial projections for a new company are an act of imagination. Nevertheless, most business plans pour far too much ink on the numbersand far too little on the information that really matters. Why?
In an article in the Harvard Business Review, HBS Professor William Sahlman suggests that a great business plan is one that focuses on a series of questions. These questions relate to the four factors critical to the success of every new venture: the people, the opportunity, the context, and the possibilities for both risk and reward.
The questions about people revolve around three issues: What do they know? Whom do they know? and How well are they known? As for opportunity, the plan should focus on two questions: Is the market for the venture's product or service large or rapidly growing (or preferably both)? and Is the industry structurally attractive?
Then, in addition to demonstrating an understanding of the context in which their venture will operate, entrepreneurs should make clear how they will respond when that context inevitably changes. Finally, the plan should look unflinchingly at the risks the new venture faces, giving would-be backers a realistic idea of what magnitude of reward they can expect and when they can expect it.
A great business plan is not easy to compose, Sahlman acknowledges, largely because most entrepreneurs are wild-eyed optimists. But one that asks the right questions is a powerful tool. A better deal, not to mention a better shot at success, awaits entrepreneurs who use it.
The Opportunity of a Lifetime—or Is It?
Nine Questions About the Business Every Business Plan Should Answer
- Who is the new venture's customer?
- How does the customer make decisions about buying this product or service?
- To what degree is the product or service a compelling purchase for the customer?
- How will the product or service be priced?
- How will the venture reach all the identified customer segments?
- How much does it cost (in time and resources) to acquire a customer?
- How much does it cost to produce and deliver the product or service?
- How much does it cost to support a customer?
- How easy is it to retain a customer?
Who are These People, Anyway?
Fourteen "Personal" Questions Every Business Plan Should Answer
- Where are the founders from?
- Where have they been educated?
- Where have they worked and for whom?
- What have they accomplished professionally and personally in the past?
- What is their reputation within the business community?
- What experience do they have that is directly relevant to the opportunity they are pursuing?
- What skills, abilities, and knowledge do they have?
- How realistic are they about the venture's chances for success and the tribulations it will face?
- Who else needs to be on the team?
- Are they prepared to recruit high-quality people?
- How will they respond to adversity?
- Do they have the mettle to make the inevitable hard choices that have to be made?
- How committed are they to this venture?
- What are their motivations?
by William A. Sahlman, excerpted from "How to Write a Great Business Plan" by William A. Sahlman in the Harvard Business Review, July-August 1997.