Ask HN: How to write a business plan for an Internet startup?

https://news.ycombinator.com/item?id=424964

by hamgav • 18 years ago

51 49 18 years ago

news.ycombinator.com

I've been approached by some investors who want to invest in my startup. They've asked me to put together a business plan - listing costs/revenue etc. Do I include my salary costs in this or do I assume that I won't be taking a salary? Any feedback/reading material will help!

Skeletor4• 18 years ago

I just took a 10 week entrepreneur course called FastTrac, there are many local versions of the course throughout the US. I took a version in NYC. The course met once a week for 3 hours and was a great networking and social gathering. It was taught by a Professor at Fordham University who has his own startup company and used to be a VC.

The goal of the course was to teach you how to run a business and complete a working business plan after 10 weeks. Each class had a guest speaker and round table discussions. They focused on a different topic every week: market research, sales, accounting, legal needs, financial projections. I highly recommend the course if you want a crash course in how to write a business plan.

justinchen• 18 years ago

I think that depends on if you need the salary for the timeframe in your plan. The investors want to make sure you'll be around to see the startup succeed so unless you're independently wealthy (or at least have enough to cover yourself for a few years) I'd include it.

axod• 18 years ago

A related question, how much is a reasonable salary for a startup founder? Do investors usually assume the founders will be living in squalor, eating noodles and paying themselves nothing until profitability, or are investors usually open to founders that have existing financial commitments - family, mortgage etc.

Probably varies massively, but I've often assumed that investment often requires you don't take a salary, or very much at all anyway.

ambition2• 18 years ago

Austin Hill @ StartupEmpire in Toronto suggested that a reasonable VC-funded startup salary is based on needs rather than competitive salary. E.g. living expenses + a little, which means more $ for a CEO with a family & mortgage and less for a 22-year-old. He pointed out that you don't want to starve the CEO or force them to live in squalor because it's just not productive, e.g. the CEO needs to be able to rest well and stay healthy. Some VCs also tossed out $90k-$150k as reasonable salary once the company is able to self-fund that.

tptacek7• 18 years ago

I have a lot of friends that are in or have been through A-round-funded startups, and I've been through several myself. All of them took market-rate salaries. I worked a year without salary to start a company in '99, but all three of us took market salaries (over my objection, which I'm now happy wasn't honored) when we closed the first round.

Mystalic2• 18 years ago

Good business plans are tough. I was taught at Northwestern by a very successful entrepreneur how to build the presentation, business plan, and financial model.

You need to cover the basics. Here's what my last one covered:

- Executive Summary

- Project Information

- Company Description

- Market and Industry Analysis

- Marketing and Sales

- Operations

- Management

- Capitalization and Structure

- Development and Milestones

- Financial Projections and Models

- Summary and Conclusion

It's no easy matter. This was a 30 page plan. I'd love to talk about the breakdown via IM or skype; it's just too much information to put into one comment.

ambition2• 18 years ago

I for one would be interested in a write-up/HN submission.

tptacek7• 18 years ago

Has a 30 page business plan ever directly helped a company you worked on? I'm not challenging you, I'm genuinely interested.

Mystalic2• 18 years ago

It helps get money, period. I organize things via basecamp and wikis, not by a business plan.

Business plans are a VC marketing tool for me.

mattmaroon3• 18 years ago

While I realize much of the capitalist world still operates this way, I'd be hesitant about anyone who asked for a business plan. While a business plan isn't entirely a waste of time, there's just so much of it dedicated to pulling meaningless numbers out of your ass as to be an exercise in futility, and it gives them something to be pissed at you about later if you miss your fictional quotas.

And if I even heard the phrase "pro forma" I'd run.

mseebach2• 18 years ago

The purpose of a business plan is to show that you've given some thought to how you'll run and grow the business. Anyone who thinks that's an exercise in futility will have a hard time getting funding.

If you have an idiot investor, sure they might be pissed at you because of missed quotas, but you can also use them to look at your cash flow. If miss my Q4 quota by 30%, does that cause me to go bankrupt in Q2 this year? If I've spend the time setting up a cash flow budget, I'll know ahead of time, and can plan accordingly, if not, some day you're just going to hit a wall.

A business plan is basically a collection of things that are pretty smart to think about and write down. Things can change, and should change, but that is also easier with a business plan - you'll update it, and that'll give you an idea what else you need to change to accommodate the new environment.

Taking things as they come may work reasonably well for a 1-2 person setup, paying the bills with on-the-side consulting, hoping to go bootstrapped some time, but once someone is ready to dump real money in your lap, I'd be very hesitant about anyone being quite so lax about the sense in putting to paper what you're going to do with that money, and how the investor can hope to get paid.

mattmaroon3• 18 years ago

The purpose of part of the business plan is to show that you've given thought. A business plan is basically a collection of things that are pretty smart to think about and write down, plus a whole bunch of other crap you pulled out of your ass to try to impress investors. Smart investors have their own ass from which to pull numbers.

I know lots of people who got funding with no business plan, in fact few tech companies have them at all anymore. Giving thought to what you're doing does not necessitate a business plan.

Rather than making you waste days or weeks of your time writing one, smart investors simply ask you all of the key questions. Who are your competitors and how can you differentiate was asked in every meeting I've ever been to. I couldn't have raised funding once, let alone the multiple times we have, without having given thought to that and being able to answer.

webwright4• 18 years ago

Everyone has different experiences and needs, but I'll tell you my experience:

1) Most investors of internet startups don't ask to see a business plan. Maybe half want a short (1-2 page) narrative about the business-- an executive summary.

2) I've written formal business plans for two businesses in the past and they sat on the shelf collecting dust thereafter. In 6 months they were sorta obsolete. In 12 months they were freakin' hilariously wrong. New companies change to fast to do that much formal planning.

A good investor will recognize that. They won't ask for a business plan-- but they will ask a bunch of hard questions to make sure you've thought about the important issues.

webwright4• 18 years ago

We talked to about 20 investing entities (maybe 5 or 6 VC firms, a mess of angels, and a few angel groups). Exactly 1 asked for a business plan and they were the lowest quality entity with the least success/experience.

Fred Wilson (one of the top consumer VCs in the world) said that 17 out of 26 of his "successful" investments (with exits) utterly changed their business model between investment and exit. In other words, a business plan has a roughly 60% chance of being obsolete.

Planning is good. You should rough out some numbers. Build a spreadsheet or two. If it's ad supported, get a sense of CPMs in your market and try to figure out how many ad views you'd need to support a real business. If it's a B2B offering, rough out what you can charge, investigate low cost distribution angles (SEO, SEM, etc). In short, prove to yourself (and others) that your business has some legs to stand on.

Write this down in an executive summary and be able to talk about it in some more detail... But writing a formal business plan? Chances are you don't know what business you're really in yet. And if you think you do, there are pretty good odds that you're wrong.

Of course, if you have a mature startup (a year or two old, a pile of customers), then some more structured planning might be appropriate.

tptacek7• 18 years ago

What are the top 3 things you'd want to have handy in Excel when you sat down to a second meeting with a strong-sounding investor, webwright?

mixmax3• 18 years ago

I've written more business plans than I care to think about. This is my experience:

1) A business plan is a marketing document. Usually you are using it to sell your business to banks, investors or partners. You have to think of your audience when you write it. An investor likes to see projected revenues that are high and don't mind that there's a risk - banks are the other way around.

2) Don't use business plans as a plan of how to run your company, write a one page strategy note instead. I have never seen a businessplan that was followed 100% and turned into a successful business. Everything changes fast in a startup, and you have to adapt accordingly.

3) Make sure you don't write something in your businessplan you can't honor. Investors and banks will look at it and blame you if they invested money and you don't live up to what you have written. Make sure to have escape routes. (If this and this market condition is true we will do such and such, if it isn't we can't do jack shit, we expect to do such and such but require this or that to reach these lofty goals) This will give you leverage and deniability in later negotiations.

4) Make sure you use a lot of sources to underpin and validate your assumptions (Gartner projects that within the next five years this trend will do something, making it inevitable that we will make loads of money since we're currently the only ones in this business) This will lend you credibility.

5) Make good budgets, and talk about your assumptions in the business plan. Budgets are the first thing investors look at. Particularly the assumptions behind the numbers.

6) Beware of investors that think everything in your business plan is a road map that simply needs to be followed in order to attain fame, glory and fuck-you money: They don't know what they're talking about.

tptacek7• 18 years ago

Do you have any stories about how any of those business plans helped companies you were working on? I'd love to hear some.

mixmax3• 18 years ago

They helped get funding for two companies I started :-)

I've found that it's really hard to write business plans for other people, and for companies you aren't directly involved in. It's probably a bit like when biz types ask a programmer to write what it says in their business plan - they haven't really thought about a lot of the underlying assumptions and how much work it is to do right. It works the other way around too.

I just wrote a somewhat related blogentry here: http://www.maximise.dk/blog/2009/01/business-plans-for-hacke...

Skeletor4• 18 years ago

I don't like your statement about a business plan not being a plan to run your company, that is exactly what it should be. Though maybe your 1 page strategy document is your real business plan. The business plan is just a name though, you should have 2 sets of books/plans: 1) Internal accounting that is very pessimistic and realistic and assumes the worst case scenario and prepares for it. 2) External accounting that is incredibly optimistic and assumes every possible best break will happen 100% of the time.

brk2• 18 years ago

I'm not sure if this is what you were saying, but you should NEVER have 2 sets of actual accounting books. The numbers are the numbers, the truth is the truth.

You can create and present a document that shows your expectations and assumptions, but you can't say you made X amount of sales and Y amount of profit when the real numbers are different.

In reality though, the data you show and present should be realistic and perhaps slightly cautious. This is what you are going to be measured against. Being "incredibly optimistic" when you do not believe this to be true is really kind of fraudulent.

Set expectations for what can reasonably happen with the resources/constraints you are working with. Internally, manage your capital as if it were your last dollar. If you do not meet the expectations set, determine why.

mixmax3• 18 years ago

In theory I agree with you - but in practise I don't.

There are a number of reasons why business plans don't seem to work as a plan to run the company.

- The business plan of many companies tends to be a stale document that never gets rewritten, and gets more and more out of whack with reality until it is completely obsolete.

- If there are many stakeholders (investors, founders, banks, partners. etc.) they will all need to give their consent whenever changes are made. This easily turns into political hell with you in the middle.

- The more specific you are in your businessplan the more it will come back to haunt you. If you wrote it and it turns out not to be the way you said it's your falut.

- Nobody actually reads updates to business plans, thus rendering them unusable.

Some of these can of course be remedied, but it's a lot of hard work. And maybe that effort is better used building a product or getting customers.

blender• 18 years ago

I'll second mattmaroon's comments and say that you're probably barking up the wrong tree. You should try to self-finance or go after love-money (family and friends) first. Once you have traction and revenue a commercial or short-form business plan might make more sense - until then it's all wishful thinking.

With that said I have found SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis to be a useful tool...

Cheers

pedalpete• 18 years ago

I'd start by getting the budget and forecast together, and then write the executive review. Get some feedback on it, and then pass it to the investors.

Go from there. You'll get an idea from the feedback and from what the investors say to know if you should proceed writing the entire plan, maybe they will find some holes in it, etc. etc. Then if they still want the full plan in writing, go write it. You'll probably learn a ton just in the process of writing the executive review.

puzzle-out• 18 years ago

Your in an interesting, slightly unusual position here. That is, the investors have approached you, rather than vice versea. Business plans are normally written for a more general audience - I would find out more about these guys' other investments and see what makes them tick, and weight the business plan towards those interests. This may sound a little manipulative, but as some of the other posts have pointed out, a business plan is a fundamentally an investment-raising document, and in the medium term often has little relevance for the running of the company. But of course you should take a salary, it would seem unprofessional not to.

Flemlord• 18 years ago

John Nesheim sells an Excel spreadsheet ($25) for creating financial projections. My background doesn't include accounting so it was a big help, factoring in many things I wouldn't have thought to put in our plan. I used it successfully to raise my first round of funding.

http://www.nesheimgroup.com/quickup_model

(The financial projections are just one component of your business plan, of course.)

whyleyc• 18 years ago

I wonder if Chad and Steve from YouTube had a business plan, or Craig Newmark, or Steve Jobs ?

Don't write a business plan.

Instead spend the time you would have spent on the plan putting together a kickass demo, or working on the product.

Having been approached, you're operating from a position of strength already. You should work that to your advantage - if you don't need the money then you can afford to negotiate more on your own terms.

If some documentation is required put together a Powerpoint of 5-10 slides explaining:

- Your product, and why it is unique (and defensible to competition)

- Your team's credentials and experience

- Your market, it's size

- Your competitors (including SWOT analysis)

- Your funding requirements (including salary)

- Your best and worst case scenarios for growth

gsmaverick• 18 years ago

Chad said at a dinner that when he and Steve made the rounds on Sand Hill road, they had a working product, and users to prove their idea was good. They didn't bring a business plan or any fancy presentations.

supahfly_remix• 18 years ago

hmm...I'm not sure Chad Hurley's case is a good example because he had some excellent connections. His father-in-law is Jim Clark of Netscape/SGI fame. I'm sure that helped open doors, and let them be taken more seriously.

KLAW• 18 years ago

Your salary should be basic, covering your costs and giving you a bit of spending money. This assumes you're working full time for the startup. Remember that the bigger picture is equity.

Some good tips here: http://blog.guykawasaki.com/2007/07/how-to-write-a-.html

Whatever you do don't spend a month writing a 60 page document. Keep it short and sweet. Use lots of bullet points / bold highlighting to ease readability. No complex multi-idea paragraphs. And most of all, just answer the key questions.

Good luck.

tptacek7• 18 years ago

Do we believe Kawasaki on this one? He says, paraphrasing, "a pitch is a great communication tool, but no substitute for a plan", which he says you should write in 12 point type for people over 50. I feel like webwright at least would contradict this advice.

matt1• 18 years ago

Is your website http://www.sendible.com/ (your first HN submission and the only one that isn't a question)?

tptacek7• 18 years ago

Instead of writing a full-on business plan, which is a huge waste of time, consider coming back to them with a set of spreadsheets. I've had to do business planning work for products I managed, and what the CEOs wanted was Excel. You might look more professional for not coming to them with a three-ring binder.

With that said, and with the huge caveat that while I've done this before, my advice might not be the current hotness:

(.) You need a table for revenue growth, quarter by quarter, in your case probably based on users and conversion rate scenarios.

(.) You might consider a seperate table for pricing; of all the things you write in the plan, pricing is the most likely to change, but do a couple scenarios, keep conversion/close rate in mind.

(.) If it makes sense for your product, segment the market and get that in a table; you might do, "home office", "small business", "enterprise", and have a pricing/phase-1/phase-2 revenue scenario for each model customer based on your pricing. Include a SWAG total addressable market size (there are, say, 2000-4000 "enterprises" to sell to).

(.) You can do a schedule table, quarter by quarter, and use it to set a conversion rate for each market segment, to chart featuresets in your product, when they'll be released, and what releasing them will do to your cash flow.

(.) If you have significant marketing expenses, break them down into line items quarter by quarter, showing some things kicking in later. You can break this down by outreach mechanism (direct mail, blogging, AdWords, research).

(.) You need a table for headcount; we just SWAG a common (somewhat lowball) fully loaded cost for everyone from management to QA; remember fully loaded adds (say) 30% for taxes, health insurance, and equipment/office/overhead.

(.) You need a table for all your expenses, quarter by quarter, which should include headcount, a line item for hosting/bandwidth/server/etc, marketing,

(.) I'm probably missing something, but with all that, you should be able to do a final seperate sheet, call it "use of proceeds", broken down by engineering, opex (hosting etc), sales, and administrative costs, quarter by quarter, against revenue.

Of all the things you "plan" now, pricing is the most likely to change, so don't get too hung up.

Lowball your headcount. Don't include anything you could reasonably outsource (like accounting, HR, graphic design).

Do you want to take a salary? What I think is, lots and lots of people pitch investors saying they'll forego salary; it's a cliche. You might look more serious if you're up front.

This is all going to sound over the top, and that's because it is, but on the other hand you're not going to do any of these things (price a product, figure out how many people to hire next month, allocate dollars to anything but AdWords) without these spreadsheets. A bunch of this stuff is optional (don't do a marketing plan if your marketing plan isn't crucial; maybe don't do a product schedule if long term product vision isn't a huge part of your pitch --- the schedule will embarass you 2 months from now).

ryuio• 18 years ago

Business plan is the biggest piece of bull crap. You should know your business or do whatever it takes to learn it and persist - that is the only thing that is required and a smart investor will get that and ask the right questions.

Still, write it if you think that it will get you the money and then promptly discard it, or better still ask them to write it - obviously if they understand enough they should rely on their numbers more than anyone elses.

If they say that your business plan is not good enough, ask them to shove it up their sorry ass.

fallentimes• 18 years ago

TicketStumbler is my third business and the closest thing I've ever done to a business plan is the YC application form. Know what problem you're solving, why you're solving it, who has this problem, how you're going to solve it and (maybe) monetization options.

I think a business plan could be important if you're looking to take gobs of money, but your query makes it sound like the investors are angels. Maybe providing more details would help everyone provide further feedback?

Stalemelon9• 18 years ago

Business Plan Pro is AMAZING :-)

hamgav• 18 years ago

To clarify, I work for a software consulting company. The potential investors would be the directors of this company. They themselves, have sold a startup for millions... What would u do?

anamax• 18 years ago

> I've been approached by some investors who want to invest in my startup. They've asked me to put together a business plan - listing costs/revenue etc.

Are said investors paying enough for what they want? Or, would you be better off doing something else?

I'm assuming that you have enough of a plan to run your biz and enough accounting to know what's happened in the past.

If that information is not what they want (and "not what they want" includes "we need it in a different format") or they don't understand what you've got (assuming that you're willing to share a redacted version), why do you want them as investors?

Ask HN: How to write a business plan for an Internet startup?

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