BUDDING entrepreneurs often ask me: 'What does an investor look for in a business plan?'
I am asked this question as an entrepreneurship educator; as director of the NUS Entrepreneurship Centre, which provides start-up funding to ventures by National University of Singapore professors, students and alumni; and as an active business angel, having invested in about a dozen start-ups in Singapore, Silicon Valley, China and India over the past decade.
When a business plan is pitched to me, I judge it on what I call the 3Cs.
How does the venture CREATE value?
How does it CAPTURE value?
How does it COMMUNICATE value?
At the heart of any new venture is the identification of a potential opportunity and a plan of action to exploit it.
So any good business plan must explain how good the opportunity is, and how and why the people behind the plan can exploit it better than others.
I believe the 3Cs help discipline our thinking about opportunity - and exploiting it - by testing the viability of a proposed business.
Value creation
Every business, no matter what it does, only exists because it creates value for customers. So we must be able to translate the opportunity a business plan seeks to exploit into specific answers to the following questions:
What is the customer problem or need that you have identified?
How big is it? How many customers are there?
Who will pay to solve or fulfil this problem or need, and how much?
What products or services do you intend to offer to solve or fulfil this problem or need?
By how much does the value of your proposed products or services exceed the cost of providing them?
Many business plans I come across fail to pass even this first test.
While they talk about the wonderful technical inventions or business ideas, they either fail to demonstrate the existence of real paying customers or do not take into account the full cost of converting their ideas into usable products.
Value capture
Many entrepreneurs, particularly techies, think they have the makings of a business just because they have developed something that people want.
Unfortunately, this is often not true. You may not be able to capture much of the value you create because of the existence of competition. And competition comes from not just other companies offering similar products or services.
There are four other sources of competitive pressure that any business needs to watch out for: potential new entrants; close substitutes; and powerful buyers and suppliers. In combination, these competitive pressures can drive your price down or squeeze your margin to nothing.
To pass the value capture test, a business plan needs to:
Show convincingly why some of these competitive forces are - and will remain - absent.
Or clearly identify the unique competitive advantages the proposed venture has to counter them.
It is usually a bad idea for a business plan to proclaim that there is no competition, as many naively do.
To the experienced investor, this suggests the entrepreneur has not done his homework or that the business opportunity is non-existent or so tiny that nobody else bothers to enter.
From an investor's perspective, competition is a good thing, for it provides validation that market potential is real, not imagined. The challenge is for the entrepreneur to show that his offering is so good that it can capture a viable market share, despite the competition.
Value communication
Even after a business plan has passed the above tests, we are still not home free.
There is one remaining test: how the venture can communicate its value convincingly to its customers and resource partners.
This is of particular concern for start-ups trying to offer radically new products or services that customers are not familiar with.
First, there is the liability of being new. If a new venture needs to sell to large enterprises - or to sell through large distribution channels - this is usually a major warning sign. Many of these enterprises tend to be conservative and will not buy from an unknown entity with no track record, no matter how good the product is. Second, when a product or service is novel, much user education is needed, which will raise upfront cost and delay the revenue stream.
These go-to-market problems are part of a broader value communication challenge that a new venture needs to address.
You may have a great product, but unless people are aware of it, understand what it does and trust in your organisation to deliver it, there will be great resistance to first adoption.
Everybody is waiting for other credible reference customers to prove viability first. What is worse, if your innovation disrupts the existing business ecosystem and requires new distribution channels or adaptations by existing suppliers, you are unlikely to get their help to get started. You will also have difficulty attracting top talent to join your venture if you cannot communicate a compelling vision.
Unless a business plan sets out clearly how it can overcome these value communication challenges, and still shows financial viability despite the added costs of doing so, it is not fundable despite passing the two earlier tests.
For those interested in pitching a business plan, take part in the Start-Up@Singapore 2009 business plan competition, organised by NUS Entrepreneurship Society (www.startup.org.sg), or join the various events in the Global Entrepreneurship Week starting today (www.entrepreneurshipweeksg.org).
The writer is a professor at the NUS Business School and the LKY School of Public Policy, and is concurrently the director of the NUS Entrepreneurship Centre, a division of NUS Enterprise. He blogs about entrepreneurship and angel-investing at connect-the-dots-Singapore.blogspot.com
This article was first published in The Business Times on November 17, 2008.
