9 PROOF OF CONCEPT: A NEW APPROACH TO BUSINESS PLANS
Learning Objectives • Describe how to move from a feasible concept to a proof of concept. • Identify stakeholder interests. • Explain the components of a compelling executive summary. • Discuss how to organize a business plan effectively. • Describe how to successfully pitch a new business.
From Feasibility to Proof of Concept • Proof of concept (POC): • Evidence that a technology, product, business model or idea is feasible • Two types of POC: • Technology or product POC • Business model POC
Spectrum of POC Approaches Figure 9.1
The Micro Strategy Approach to Proof of Concept • Entrepreneur’s Micro Strategy for Proof of Concept consists of three primary elements: • Outcomes: near-term goals the entrepreneur is attempting to achieve • Assets: human, social, physical, and financial needed to achieve the desired outcomes • Actions: tasks entrepreneur must undertake to achieve the necessary outcomes
Micro Strategy Decision Making • Today’s environment necessitates a greater use of intuitive decision making. • Avoid potential failure points by conducting a premortem. • Common failure points: • Pattern recognition bias (“We always do it that way”) • Overly optimistic forecast of markets
Proof of Concept • Proof of concept with a prototype • Entrepreneur develops clear understanding of customer needs. • Changes can be made early in the process when they are less costly. • The prototype reduces the risk of failure. • Proof of concept with a website • Avoid the single page marked “under construction.” • Avoid posting proprietary information that is not patented or trademarked.
Proof of Concept (cont’d) • Proof of concept with purchase orders and customer sales • Customers that pay up front save company on inventory costs and fund manufacturing costs.
Investors Interests • Rate of growth • Return on investment • Degree of risk • Degree of protection
Bankers’ & Lenders’ Interests • Company margins and cash flow projections • The amount of money needed • The kind of positive impact the loan will have on the business • The kinds of assets the business has for collateral • How the business will repay the loan • How the bank will be protected if the business does not meet its projections • The entrepreneur’s stake in the business
Strategic Partners’ Interests • Licenses for manufacturing and assembly • Supply of raw materials in exchange for equity interest • Formal or informal partnership agreements
Creating a Compelling Story • In an executive summary: • Convey the compelling story quickly and memorably. • Highlight the critical elements of the business that provide a competitive advantage. • Present a coherent path to profitability and success that make sense. • Demonstrate that the team can successfully execute the plan.
Creating a Compelling Story (cont’d) • Should answer these questions: • What is the compelling story? • What pain is being addressed? • How is the venture solving the problem? • What is this venture’s competitive advantage? • Can this venture make money? • Can the founding team serve that need? • Why is now the right time to launch this venture? • What is the team seeking from investors?
The Full Business Plan: Strategy and Structure • Tasks to guide the preparation of the plan: • Identify who is responsible for what. • Develop a timeline based on tasks identified. • Hold the team to the timeline and work diligently to get the plan done.
Components of Business Plan • Executive Summary • The Business • Founding/Management team • Industry/market analysis • Product/service development • Operations plan • Organization plan • Marketing plan • Financial plan • Growth plan • Contingency plan & harvest strategy • Timeline to launch • Appendices • Endnotes
Financial Plan • Complete set of financial statements: • Statement of cash flows • Income statement • Balance sheet • Key ratios to gauge progress • Current ratio • Profit margin • Return on Investment (ROI) • Inventory turnover
Mistakes in Developing the Business Plan • Projected rapid growth that requires capabilities beyond those of the founding team • Envisioning a three-ring circus with only one ringleader • Reporting performance that exceeds industry averages • Using price as a market strategy for a product/service • Not investing capital in their own businesses
Successfully Pitching the Business • Keep the presentation to less than 30 minutes • Tell a compelling story first • Do not use a podium to speak • Move about without distracting the audience • Maintain eye contact with everyone • Make the visual aids simple • Use live demonstrations • CEO should do the presentation • Practice in advance
Answering Questions • Investors like to ask what they already know the answer to. • Trick questions are likely. • Don’t be afraid to not know the answer. • Founding team can join the CEO for questions.
New Venture Action Plan • Develop a micro strategy approach to achieving proof of concept. • Identify the stakeholders in the business and their interests. • Create a compelling executive summary and pitch. • Plan the development of a full business plan.