Chapter Objectives: ©2008 Prentice Hall

Chapter Objectives
(1 of 2)
1. Explain the purpose of a business plan.

2. Discuss how a business plan can be a dual-use
document.
3. Explain how the process of writing a business plan
can be as important as the plan itself.
4. Identify the advantages and disadvantages of using
software packages to assist in preparing a business
plan.
5. Explain the difference between a summary business
plan, a full business plan, and an operational
business plan.
4-1
©2008 Prentice Hall
Chapter Objectives
(2 of 2)
6. Explain why the executive summary may be the

most important section of a business plan.
7. Describe a milestone and how milestones are used
in business plans.
8. Explain the purpose of a “sources and uses of
funds” statement.
9. Describe a liquidity event.
10. Detail the parts of an oral presentation of a business
plan.
4-2
What Is a Business Plan?
• Business Plan
– A business plan is a written narrative, typically 25 to 35
pages long, that describes what a new business plans to
accomplish.
• Dual-Use Document
– For most new ventures, the business plan is a dual-purpose
document used both inside and outside the firm.
• Inside the firm, the plan helps the company develop a “road map”
to follow in executing its strategies and plans.
• Outside the firm, it introduces potential investors and other
stakeholders to the business opportunity the firm is pursuing and
how it plans to pursue it.
4-3
Who Reads the Business Plan—And What
Are They Looking For?
There are two primary audiences for a firm’s business plan
Audience What They are Looking For
A clearly written business plan, which articulates the

A Firm’s vision and future plans of the firm, helps the employees of
Employees a firm operate in sync and move forward in a consistent
and purposeful manner.
A firm’s business plan must make the case that the firm is a
Investors and good use of an investor’s funds or the attention of other
Other External external stakeholders. The key is to include facts generated
Stakeholders through a properly conducted feasibility analysis. A
business plan rings hollow if it is based strictly on what an
entrepreneur or team of founders “thinks” will happen.
4-4
Guidelines for Writing a Business Plan
(1 of 4)
• Structure of the Business Plan

– To make the best impression, a business plan should follow
a conventional structure, such as the outline for the
business plan shown in the chapter.
– Although some entrepreneurs want to demonstrate
creativity in everything they do, departing from the basic
structure of the conventional business plan format is
usually a mistake.
– Typically, investors are very busy people and want a plan
where they can easily find critical information.
4-5
(2 of 4)
• Structure of the Business Plan (continued)

– Software Packages
• There are many software packages available that employ an
interactive, menu-driven approach to assist in the writing of a
business plan.
• Some of these programs are very helpful. However, entrepreneurs
should avoid a boilerplate plan that looks as though it came from a
“canned” source.
– Sense of Excitement
• Along with facts and figures, a business plan needs to project a
sense of anticipation and excitement about the possibilities that
surround a new venture.
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(3 of 4)
• Content of the Business Plan

– The business plan should give clear and concise
information on all the important aspects of the proposed
venture.
– It must be long enough to provide sufficient information
yet short enough to maintain reader interest.
– For most plans, 25 to 35 pages is sufficient.
• Types of Business Plans
– There are three types of business plans, which are shown
on the next slide.
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(4 of 4)
Types of Business Plans
4-8
Outline of Business Plan
• Outline of Business Plan

– A suggested outline of a business plan is shown on the next
several slides.
– Most business plans do not include all the elements
introduced in the sample plan; we include them here for the
purpose of completeness.
– Each entrepreneur must decide which elements to include
in his or her plan.
4-9
Exploring Each Section of the Plan
(1 of 10)
• Cover Page and Table of Contents

– The cover page should include the name of the company,
its address, its phone number, the date, and contact
information for the lead entrepreneur.
• The Executive Summary
– The executive summary is a short overview of the entire
business plan; it provides a busy reader with everything
that needs to be known about the new venture’s distinctive
nature.
• In many instances, an investor will first ask for a copy of the
executive summary and will request a copy of the full business
plan only if the executive summary is sufficiently convincing.
4-10
(2 of 10)
• The Business
– The most effective way to introduce the business is to
describe the opportunity the entrepreneur has identified–
that is, the problem to solve or the need to be filled–and
then describe how the business plans to address the issue.
– The description of the opportunity should be followed by a
brief history of the company, along with the company’s
mission statement and objectives.
– An explanation of the company’s competitive advantage
and a brief description of the business model follow.
4-11
(3 of 10)
• Management Team
– As mentioned earlier, one of the most important things
investors want to see when reviewing the viability of new
ventures is the strength of its management team.
– If the team doesn’t “pass muster,” most investors won’t
read further.
– The material in this section should include a brief summary
of the qualifications of each member of the management
team, including his or her relevant employment and
professional experiences, significant accomplishments, and
educational background.
4-12
(4 of 10)
• Company Structure, Ownership, and Intellectual

Property
– This section should begin by describing the structure of the
new venture, including the reporting relationships among
the top management team members.
– The next part of the section should explain how the firm is
legally structured.
– The third part of this section should discuss the intellectual
property the firm owns, including patents, trademarks, and
copyrights.
4-13
(5 of 10)
• Industry Analysis
– This section should begin by discussing the major trends in
the industry in which the firm intends to compete along
with important characteristics of the industry, such as its
size, attractiveness, and profit potential.
– This section should also discuss how the firm will diminish
or sidestep the forces that suppress its industry’s
profitability.
– The firm’s target market should be discussed next, along
with an analysis of how it will compete in that market.
4-14
(6 of 10)
• Marketing Plan
– This marketing plan should immediately follow the
industry analysis and should provide details about the new
firm’s products or services.
– After reading this section of the plan, an investor should be
confident that the firm’s overall approach to its target
market and its product strategy, pricing strategy, channels
of distribution, and promotional strategy are in sync with
one another and make sense.
4-15
(7 of 10)
• Operations Plan
– This section of the plan deals with the day-to-day
operations of the company.
– An overview of the manufacturing plan (or service delivery
plan) should be followed by a description of the network of
suppliers, business partners, and service providers that will
be necessary to build the product or produce the service the
firm will sell.
– Any risks or regulations pertaining to the operations of the
firm should be disclosed, such as nonroutine regulations
regarding waste disposal and worker safety.
4-16
(8 of 10)
• Financial Plan
– The financial section of the plan must demonstrate the
financial viability of the business. A careful reader of the
plan will scrutinize this section.
– The financial plan should begin with an explanation of the
funding that will be needed by the business during the next
three to five years along with an explanation of how the
funds will be used.
• This information is called a sources and uses of funds statement.
– The next portion of this section includes financial
projections, which are intended to further demonstrate the
financial viability of the business.
4-17
(9 of 10)
• Financial Plan (continued)

– The financial projections should include three to five years
of pro forma income statements, balance sheets, and
statements of cash flows, as described in Chapter 8.
– It is important to remember that the business plan should
be based on realistic projections.
• If it is not and the company gets funding or financing, there will
most certainly be a day of reckoning. Investors and bankers hold
entrepreneurs accountable for the numbers in their projections.
4-18
(10 of 10)
• Critical Risk Factors

– Although a variety of potential critical risks may exist, a
business should tailor this section to depict its truly critical
risks.
• Appendix
– Any material that does not easily fit into the body of a
business plan should appear in an appendix. Examples of
materials that might appear in the appendix include:
• Resumes of the top management team members, photos or
diagrams of product or product prototypes, certain financial data,
and market research projections.
4-19
Putting It All Together
(1 of 2)
The 10 Most Important Questions a Business Plan Should Answer
Is the business just an idea, or is it an Does the firm have an exciting and
opportunity with real potential? sensible business model? Will other
firms be able to easily copy it?
Is the product or service viable? Does it Is the industry in which the product or
add significant value to the customer? service will be competing growing,
Was a feasibility analysis completed? stable, or declining?
Does the firm have a well-defined

target market?
4-20
Putting It All Together
(2 of 2)
The 10 Most Important Questions a Business Plan Should Answer
Is the management team experienced, Is the firm organized in an appropriate

skilled, and up to the task of launching manner? Are its strategy and business
the new firm? practices legal and ethical?
Are the financial projections realistic,

and do they project a bright future for How will the firm’s competitors react
the firm? What rate of return can to its entrance into their markets?
investors expect?
What are the critical risks surrounding the business,

and does the management team have contingency
plans in place if risks become actual problems?
4-21
Presenting the Business Plan to Investors
(1 of 3)
• Making a Presentation to Investors

– If the business plan successfully elicits the interest of
potential investors, the next step is to meet with the
investors and present the plan in person.
– The first meeting with an investor is generally very short,
about one hour. The investor will typically ask the firm to
make a 20- to 30-minute presentation using PowerPoint
slides and use the rest of the time to respond to questions.
– If the investor is impressed and wants to learn more about
the venture, the firm will be asked back for a second
meeting.
4-22
(2 of 3)
• Tips on Making an Oral Presentation to Investors

– When asked to meet with an investor, the founders of a
new venture should prepare a set of PowerPoint slides that
will fill the time slot permitted.
– The presentation should be smooth and well rehearsed.
The slides should be sharp and not cluttered with material.
• The first rule in making an oral presentation is to follow
instructions. If an investor tells an entrepreneur that he or she has
one hour and that the hour will consist of a 30-minute presentation
and a 30-minute question-and-answer period, the presentation
shouldn’t last more than 30 minutes.
4-23
(3 of 3)
Ten PowerPoint Slides to Include in an Investor Presentation
1. Title slide
2. Problem
3. Solution
4. Business model
5. Management team
6. Industry and target market
7. Competition
8. Intellectual property
9. Financial projections
10.Current status, amount of money requested, and
projected use of funds
4-24
Chapter 4 – Writing a
Business Plan
Review Questions
4-25
Review Question 4 - 1
What is a business plan? What are the advantages of
preparing a business plan for a new venture? Explain
your answer.
• A business plan is a written narrative, typically 25 to 35

pages long, that describes what a new business plans to
accomplish and how it plans to accomplish it.
• For most new ventures, the business plan is a dual-
purpose document used both inside and outside the firm.
Inside the firm, the plan helps the company develop a
“road map” to follow in executing its strategies and plans.
• Outside the firm, it introduces potential investors and
other stakeholders to the business opportunity the firm is
pursuing and how it plans to pursue it.
4-26
Review Question 4 - 5
It is often argued that the process of writing a
business plan is as important as the plan itself,
particularly for the top management team of a
young firm. How is this so?
• Writing a business plan forces the management

team of a new venture to think through every
aspect of its business and agree on its most
important priorities and goals.
4-27
Chapter 4 – Writing a
Business Plan
Application Questions
4-28
Application Question 4 - 3
A good friend of yours, Patsy Ford, has decided to leave
her teaching job to launch a private tutoring company for
grade school and middle school children.
She is putting together her business plan and asks you,

“I have a lot of books and articles that tell me how to
write a business plan, but I’m wondering if there is
anything is particular I should be careful to avoid in
putting my plan together?”
How would you respond to Patsy’s question?
4-29
Patsy should avoid the following “red flags” in
business plans: (see Table 4.2)
• Founder with none of their own money at risk;

• A poorly cited plan;
• Defining the market size too broadly;
• Overly aggressive financials;
• Sloppiness in any area.
4-30
• Suppose you have been asked by your
local chamber of commerce to teach a 2-
hour workshop on how to write an effective
business plan. The workshop will be
attended by people who are thinking about
starting their own business but don’t
currently have a business plan. Write a
one-page outline detailing what you’d
cover in the 2-hour session.
4-31
Application Question 4 – 4 …
Answer:
• Information on why writing a business plan is

important;
• Recognition of who reads business plan;
• Detailed guidelines for how to write a business
plan including a sample outline for a business
plan;
• Suggestions for how to present the plan to
investors and others.
4-32
• John Brunner is a biochemist at a major university. He is thinking
about starting a business to commercialize some animal vaccines
on which he has been working.
• John just registered for a biotech investment conference in San
Francisco.
• A number of venture capitalists are on the program, and John
hopes to talk to them about his ideas. John hasn’t written a business
plan and doesn’t see the need to write one. When asked about this
issue, he told a colleague, “I can sell my ideas without the hassle of
writing a business plan. Besides, I’ll have plenty of time to talk to
investors at the conference. If they need additional information, I
can always write something up when I get home.”
• Explain to John why his approach to the development of a business
plan is unwise.
4-33
Application Question 4 – 5…
• John’s approach is unwise.
• First, the process of writing a business plan will force John to think
through all aspects of his potential business—something that he
probably hasn’t done. As a result, if John has written a business
plan, he will probably be better prepared to discuss his venture idea
with investors.
• Second, it is conceivable that an investor will ask John for copy of
his plan. If John says, “I don’t have a plan, but I’d be willing to write
one and send it to you in two weeks,” the investor may be
unimpressed. It would be much more impressive for John to be
able to say, “I’d be glad to e-mail you my plan the day I return
home.” That reply signals to the investor that John is serious
enough about his venture that a plan has already been written.
4-34
• Imagine you just received an e-mail message
from a friend. The message reads, “Just wanted
to tell you that I just finished writing my business
plan. I’m very proud of it. It’s very
comprehensive and is just over 100 pages. The
executive summary alone is nine pages. I plan
to start sending it out to potential investors next
week. Do you have any words of advice for me
before I start sending it out? Be honest—I really
want to get funding.” How would you respond to
your friend’s request for feedback?
4-35
Application Question 4 – 6 …
• Your friend’s approach is a mistake.
• No one will read a 9 page executive summary, let alone
a 100-page business plan.
• Most business plans are 25 to 35 pages long, and
regardless how complicated the new venture is, or how
much work an individual is willing to put into a plan, it is
best to stick to the conventional page limits.
• Remember, additional information can be placed in an
Appendix, but the plan itself should be rather short. As
hard as it is to believe, most investors and others who
read business plans see a long plan as a weakness
rather than a strength.
4-36
• Do some Internet research on business
plans. Make a list of at least 10 locations
on the Internet that provide access to high-
quality advice about how to write an
effective business plan, and be prepared
to discuss why you find the locations you
chose helpful.
4-37
You Be the VC
Zillow
4-38
Zillow
Company:
– Zillow
– www.zillow.com
• Business Idea:
– Help people make smarter real estate decisions by providing them with
free, fast, and accurate estimates of the values of the properties they
are interested in.
• Pitch:
– If you’ve ever looked for a home you know what a hassle it can be.
It’s hard to know if a particular property is undervalued or
overvalued, and if the real estate agent is being completely
forthright. It’s also hard to know where to go to get good
information if you want to do your own research. Most people only
buy homes, or investment properties, a few times in their lives. As
a result, it’s not practical to become an expert on real estate
valuations.
4-39
Zillow
What is Zillow?
Zillow is an online real estate service that was created to help solve
these problems. It helps people obtain free and objective home
value estimates.
To use Zillow, all you have to do is go to the company’s Web site

and type in the address of the property you’re interested in. In a few
seconds you will get an estimate—or “zestimate”—of the value of
the home (go ahead and try it for the home you were raised in). The
service offers several other features as well, including value
changes of homes in a given time frame, aerial views of homes
(using Google maps), and the prices of the homes in the
surrounding area. It also provides basic data on homes, such as
square footage and the number of bedrooms and bathrooms.
4-40
Zillow …
Strength of New Venture Team:
Score 4 (on a scale of 1 – 5)
• Co-founder Rich Barton is the founder of Expedia, the online travel

site. He is also a Microsoft veteran. Rich is currently a venture
partner at Benchmark Capital, and is on the Board of Directors of
Netflix.
• Co-founder Lloyd Frank is also an Expedia and Microsoft veteran.
Most of the members of Zillow’s management team are former
Expedia and Microsoft executives (Expedia was started within
Microsoft in 1994).
• Zillow has a five-person Board of Directors and a three- person
technical advisory board. The directors include venture capitalists,
real estate industry personnel, and Zillow executives.
4-41
Zillow …
Strength of the Opportunity:
The strength of the opportunity is unclear. Zillow’s service is free to

the user, and apparently the only way the company makes money is
by selling advertising on its Web site.
The company claims that it is one of the most visited real estate
sites on the Web, with 3 to 4 million people visiting each month. It is
unknown whether the company has additional plans for monetizing
its site.
More than half of Zillow’s visitors plan to buy or sell a house in the
next 24 months.
4-42
Zillow …
Strength of the Industry:
The real estate industry has traditionally

been strong.
But it has now been destroyed through the

sub-prime mortgage problems
4-43
Zillow …
Strength of the Business Model:
Zillow’s business model is to drive traffic to its Web site

through its home valuation service and the other
services offered on its site.
It then uses its traffic to market online advertising. There
is apparently a lot of leg-work involved in determining
home valuations online, as described in the feature.
As a result, Zillow’s business model is more labor

intensive than many Web based businesses.
4-44
You Be the VC
Zillow
Overall Score:
Strength of the New Venture Team 4

Strength of the Opportunity 3
Strength of the Industry 1
Strength of the Business Model 3
Average Score = 2.75
Continued
4-45
You Be the VC
Zillow
The Business Decision:
• One the one hand, Zillow has a very innovative and intriguing product
offering, and it is driving an impressive number of people to its Web site
every month. A total of 3 to 4 million people per month, half of whom are
thinking about buying or selling a home, is an impressive audience to deliver
to an advertiser. Zillow’s top management team is also impressive. On the
other hand, we wonder how “sticky” Zillow’s service is. Will people lose
interest over time? How many people will actually use the site on a continual
basis? And will Zillow lose credibility as people find, as they invariably will,
that Zillow’s estimates are just that—estimates—and they don’t assure the
sale price or the purchase price of a house?
• Weighing the pluses and minuses, we would not fund this venture. Instead,
we would take a wait-and-see approach, and try to discern just how sticky
and robust Zillow’s service really is.
• I am not convinced there is a window of opportunity right now.
Decision: DO NOT FUND.
4-46
Case 4.2
Pandora
4-47
Pandora
• Pandora: How a Willingness to Let Its
Business Plan Evolve Helped a Music
Company Move Forward When the Timing
Was Right
• www.pandora.com
4-48
Pandora
Question 1
• Go to Pandora’s Web site and give it a try.
(Nothing will be downloaded onto your
computer—Pandora’s service runs off your
Internet browser.) What do you think? Do
you think Pandora will attract a large
number of users? Will you use the service
again? Explain your answer.
4-49
Pandora
Question 2
• What are the most critical risk factors associated
with Pandora’s current business plan?
• Most would say that the most critical risk factor

is that people will try Pandora once or twice, and
will tire of the service.
• Another risk is that people will only use the free
version of the site, and will rarely if ever click
through and buy music as the result of hearing a
song on Pandora.
4-50
Pandora
Question 3
• What do you think motivated Pandora’s investors to put
money into the company in 2004, even though Pandora
had failed to effectively monetize its technology on two
separate occasions?
• Pandora does have a unique technology, and its

investors probably thought that the technology was
compelling enough that it would either
(1) find a commercially viable application, like Pandora’s present Web
site,
(2) will be licensed to a music company that will use the technology,
or
(3) will be purchased by a larger firm.
4-51
Pandora
Question 4
• Pandora has investors who will no doubt
want their money back, plus a handsome
return at some point in the not-so-distant
future. What is the most likely liquidity
event in Pandora’s future?
• An acquisition.
4-52
Pandora
Application Question 1
• Make a list of the parties that have a
vested interest in Pandora’s success.
How can each of these parties (i.e.,
independent musicians, record
companies, etc.) help make Pandora
successful? Make your list as complete
as possible.
4-53
Pandora
Application Question 1 …
Answer
• Pandora’s founders and management team,
who can help the company by continuing to
develop its technology and by working hard.
• Pandora’s investors, who can help by
remaining patient and allowing Pandora’s
technology and business model to evolve.
• Musicians, who can spread the news about
Pandora’s service.
• Record companies, who can also spread the
news about Pandora’s service.
4-54
Pandora
Application Question 2
Think of a time in your life when you (1)
committed yourself to achieve something
substantial, (2) your first few attempts to
achieve it failed, and (3) you eventually found a
way to be successful. What made you
persevere despite your early failures?
Compare your experience to Tim Westergren’s

experience with Pandora.
4-55

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Chapter Objectives

1. Explain the purpose of a business plan.

6. Explain why the executive summary may be the

Audience What They are Looking For

A clearly written business plan, which articulates the

• Structure of the Business Plan

• Structure of the Business Plan (continued)

• Content of the Business Plan

Types of Business Plans

• Outline of Business Plan

• Cover Page and Table of Contents

• Company Structure, Ownership, and Intellectual

• Financial Plan (continued)

• Critical Risk Factors

The 10 Most Important Questions a Business Plan Should Answer

Does the firm have a well-defined

The 10 Most Important Questions a Business Plan Should Answer

Is the management team experienced, Is the firm organized in an appropriate

Are the financial projections realistic,

What are the critical risks surrounding the business,

• Making a Presentation to Investors

• Tips on Making an Oral Presentation to Investors

• A business plan is a written narrative, typically 25 to 35

• Writing a business plan forces the management

She is putting together her business plan and asks you,

How would you respond to Patsy’s question?

• Founder with none of their own money at risk;

• Information on why writing a business plan is

To use Zillow, all you have to do is go to the company’s Web site

• Co-founder Rich Barton is the founder of Expedia, the online travel

The strength of the opportunity is unclear. Zillow’s service is free to

The real estate industry has traditionally

But it has now been destroyed through the

Zillow’s business model is to drive traffic to its Web site

As a result, Zillow’s business model is more labor

Strength of the New Venture Team 4

Decision: DO NOT FUND.

• Most would say that the most critical risk factor

• Pandora does have a unique technology, and its

Compare your experience to Tim Westergren’s

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