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Are Business Plans Still Necessary?
by Mark Suster

This is part of my ongoing series of posts and I need to file this one under both Raising Venture Capital and Startup Advice.

I remember going to an Under the Radar conference in 2006 in the heat of the Web 2.0 craze.  There were tons of young entrepreneurs showing their latest Web 2.0 wares.  Ajax was the new buzzword and many companies went overboard.  People mistook extra doses of Ajax for a successful product.

Unfortunately this was reinforced by the many conferences that rushed to espouse the benefits of Web 2.0 and the subsequent acquisition sprees of companies like Google, Yahoo!, Cisco and others went out to fill out their Web 2.0 portfolios.  Many of these businesses were what First Round Capital called FNACs (features, not companies – this acronym has always stuck with me).

The last 12 months has seen the rise of many new trends.  Facebook Apps, iPhone Apps, Social Games and now The Real-time Web (finally a new, sexier buzzword to replace Web 2.0.  RIP 2.0.  Sorry Tim O’Reilly – you’ll have to work at coining the next trend.  )

The last couple of years has also seen the huge initial success of Ycombinator, the Lean Startup and many other product driven approaches to going to market.

Broadly speaking this last trend has been healthy as it has brought an increase focus on launching products that you can test with the market and on capital efficiency.  It has also brought about my favorite new term – Ramen Profitable.  Someone remind me to do a future post on why I think the Ramen Profitable approach has actually hurt some businesses.

In all of these new product and cost-focused new trends, a big problem has emerged that all of these movements have not addressed.  In an era of “launch and learn” is there a need for a business plan?

Short answer: absofuckinglutely.  I have seen really great product people espouse the death of the business plan.  Do so at your peril.

So, definition: when I talk about a business plan I’m not talking about a 40-page Word document outlining your market approach.  That died with waterfall software development.  I’m not even talking about your 12-page Powerpoint presentation that you need to raise venture capital or to talk with potential biz dev partners.

I’m talking about your financial spreadsheet.  I will quote a prominent, well-known entrepreneur whom I like and respect and who told me when he was raising money, “I don’t know how much I’m going to charge for my product so why should I create an artificial spreadsheet?”

Here’s why.  Your financial model tells a story.  Let’s take your revenue line.  It should talk about how many customers you think you will acquire and how much you’ll charge for your product.  If you can’t estimate the former then I would suggest you haven’t done your homework before building the product.  Do you really want to spent $100k building a product to discover through Customer Development that the market is too small?

Don’t know how much you can charge for your product?  Let’s start with how much value you think you’ll create for your customer if they use your product in terms of hours saved, costs avoided, extra sales, better conversion rates or whatever.  If you have no clue then I would suggest you haven’t thought hard enough about whether there is a real problem you’re solving.  Better that you find that out before showing off your wares at the next trendy conference only to smoke your friends & families’ money.

What about your competition – how much do they charge?  If you plan to charge more than them I need to know how your product will differentiate to command a premium.  Going to charge less?  How will you go to market in a cost effective way to achieve similar margins as your competitors.

See I don’t care if your projections prove wrong over time.  I care about your assumptions going in.  I care about the thought that you’ve given to the customer problem.  I care about how much you’ve thought about market share, competitors, adoption rates, etc.

My suggestion is that you do a detailed MONTHLY plan for the first 24 months and then an annual plan for what we call the “out years,” 3,4 and 5.  Why do VC’s care about these years?  Good ones don’t care about the granular details in a startup but they do care about how big the market is, what share you’ll get and what assumptions you make about pricing over time and other market factors.  VCs care that you’ve thought about these issues.

The cost side of the equation is also important.  The COGS (costs of goods sold) tells me about how big your customer acquisition costs will be.  I should be able to test these assumptions against comparable companies.  If you’re a consumer destination the revenue and COGS lines should tell me about how big your funnel is, how you fill the top end of the pipe and what your conversion rates will be.  Ditto for enterprise software companies.

Don’t know what LTV is? It’s “lifetime value” of a customer.  If you don’t understand why this is important I encourage you to do a little Google research.  Not knowing can be the kiss of death in raising money but more frankly the kiss of death in your business.  Great product managers who are not great business people still often fail.

What assumptions do you make in the cost lines about people?  Usually in a tech / software startup 70-80% of your costs will be people.  This is where I spend most of my time.  How many people will you hire in the first 24 months and in which sequence.  How much will you pay?  Don’t know the running rate for engineers?  Fail.  This information isn’t hard to find.

How will your costs scale as your revenue scales.  We see many naive entrepreneurs who tell us, “My revenue will grow to $60 million by year 5 but my costs mostly stay flat.  I won’t need to hire many engineers or customer support staff.  This stuff is ‘zero gravity.’  Our Net Income will be $40 million.”

Really?  66% Net Operating Margins?  Show me companies doing this.  I don’t think my job is to teach you economics or financial modeling.  And frankly I’m somewhat forgiving of people who are naive about the “out years” like I outline in the last paragraph.  But many investors are not so forgiving.  Do your financial model and run it by friends or colleagues for feedback.

Finally, one last point about financial models.  They are not just for fund raising.  They are the most important document you can prepare to align your management team on where you THINK your business will go.  They are your map.  If you’re flying from SF to NY with no map I can assure you that you won’t get there.

Each quarter you should review your model.  What assumptions proved wrong in the last quarter.  How does that change your assumptions going forward?  Too aggressive about the rate of customer adoption?  Better to model that now.  You might then slow

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A CMO’s Dream Team

The 1995-96’s Bulls. The 1992 Clinton election team. These are dream teams. Extraordinary individuals who come together to accomplish extraordinary results. Marketing, like sports or politics, requires highly skilled people at the top of their game, working together seamlessly to compete and win.

Chief marketing officers, like coaches and other leaders, who seek dream teams must assemble remarkable individuals to generate remarkable results. In the past, CMOs knew who they needed on their team – some smart brand managers and some functional experts in research and media.

But the marketing landscape has changed dramatically and the skill sets and experiences needed on a CMO’s marketing bench have changed just as dramatically. New media, market fragmentation, and brand proliferation have given birth to new ways to go to market and new challenges in doing so. Today CMOs need to rethink the types of marketing expertise they need on the team.

Here are 6 types of players that can help produce winning results in today’s marketing environment:

1.  A Brand Operator – This isn’t just a fancy new label for the old brand manager function – a Brand Operator contributes a whole different perspective, skill set, and expertise. While brand managers manage activities to promote the brand, Brand Operators operationalize brands throughout the entire Company. Brands represent a way of doing things that should drive business strategy, define operating processes, and impact company culture. As such, a CMO needs someone to activate the brand in all of these areas – working with senior management, operational teams, and human resources. A Brand Operator is someone who truly understands the Company’s business and who can overcome organizational barriers to get things done.

2.  A Connections Planner – With the proliferation of new media options and the fragmentation of traditional ones, a CMO needs someone who understands the impact of different touchpoints on how customers make purchase decisions. A Connections Planner is savvy about search marketing, branded entertainment, and weblogs as well as traditional media – and is always on the lookout for emerging opportunities. He or she combines knowledge about customers’ lifestyles and media usage/exposure with data-based analyses of the efficiency and effectiveness of the different avenues to communicate with them. The result is strategies for making relevant and salient connections between the brand and its target. Until and unless agencies demonstrate the ability to plan and buy media agnostically, the responsibility for Connections Planning must remain an internal function.

3.  A Creative Leader – Far too often, CMOs leave leadership of the brand’s creative expression up to the advertising agency. In rare instances, this may come to make sense over time — but generally speaking, there is too frequent turnover of creative directors and/or agencies themselves to maintain consistency and explore the richness of brand understanding that develops only through many years. Furthermore, a Creative Leader provides inspiration and direction for the expression of the brand at all touchpoints — from tradeshow booths to corporate headquarters to salespeople’s collateral. He or she does this through an intuitive understanding of the essence of the brand and a vision for the brand’s ambitions.

4.  Customer Experts – A CMO needs a Customer Expert for each segment of the Company’s existing customers/prospects and at least one dedicated to uncovering new sources of business. While market researchers have historically been tagged as the “voice of the customer,” this approach falls short of the marketing need. The team needs someone who is more interested in customers than in methodologies — someone who synthesizes insights from all sources of information (database analyses, store audits, cultural scanning, syndicated shopping data, and even “grandmother research”) along with primary consumer research to develop a rich profile and deep understanding of the target customers.

5.  An Investment Analyst – Today’s boardroom requires a CMO to prove the return on marketing investments – and so a CMO requires an Investment Analyst on the team. This person implements the infrastructure and process for collecting the necessary marketing data, analyzes and evaluates marketing investments on a timely basis and in an objective manner, and makes recommendations for future budget allocation. Although the CFO’s office should be consulted, the job shouldn’t be left to controllers. A finance-savvy marketer will figure out how to account for, not dismiss, the subjectivity that comes with the marketing territory – and he or she will be familiar with market research data that can be used in the analyses.

6.  An Independent Advisor – The CMO needs an Independent Advisor for the same reasons Tony Soprano needs his conciliare and Jon Gruden needs a defensive coordinator on headset with a bird’s eye view of the game. When you’re in the trenches, it’s sometimes hard to see the forest for the trees – and it’s even harder to be objective about something the whole team has been passionately pursuing. Free from bandwidth and political constraints, an Independent Advisor can provide the big picture view when a reality check is needed — or dig deep into a problem to uncover an elusive diagnosis. He or she can be the source for “the word on the street,” contribute perspectives from different categories and brands, and play the role of a talent scout.

These 6 types of players can form the foundation for a winning marketing team. Of course, this begs the question of the role of the CMO.

I suggest the CMO’s primary role is one of a maestro – the conductor who brings out the specific talents of each player and brings them together to produce a great work. The CMO has the vision and recruits people with the potential to deliver it, entices and enables them to see it, and enrolls them in engaging in it – and then eliminates distractions and shores up resources. Moreover, a maestro determines spirit and style, setting the culture in which the team will operate.

The right players with the right leader and the right culture. This is the stuff dreams — dream teams, that is — are made of.

http://deniseleeyohn.com/bites/2009/10/19/a-cmos-dream-team/

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You can’t get paid for sitting on the sidelines – I always tell people that when recessions start managers in large companies get rewarded for cutting costs.  The more Machiavellian the manager is the quicker he/she rises.  But this cycle of cutting comes to an end because ultimately you can’t cut your way into business growth.  Let’s be honest – the same is true for VC’s.

-@msuster

http://www.bothsidesofthetable.com/2009/10/01/the-big-vc-thaw-why-the-market-is-moving-again-part-2-of-3/

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http://twitter.com/Armano/statuses/4558677972

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http://www.cdixon.org/?p=1177

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http://www.damniwish.com/2009/09/its-about-what-it-does-not-what-it-costs.html

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http://darmano.typepad.com/logic_emotion/2009/09/filterfailure.html

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Gavin
513 633 0573

 Sent from my iPhone

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http://scottmeis.com/2009/09/15/effective-social-media-content-relies-on-creativity/

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I've become a fan of Dick Costolo on twitter.  He's hilarious.  Gems below"

I think I'm on hold with Comcast but I might also be starring in a very large staged reading of the movie Brazil.

http://twitter.com/dickc/status/3588337441

Moving is like drinking too much. You vow to never do it again, until you do it again. Except it's every six years instead of every Thursday

http://twitter.com/dickc/status/3428736814

Sold house, moving to California. Just need to find house, buy it, move, and get kids into school in 18 days. What could possibly go wrong.

http://twitter.com/dickc/status/3146522142

Me "when's the last time you took a bath?" 7 yr old "I don't remember"

http://twitter.com/dickc/status/2819013855

My laptop believes it is 2:45pm, which i believe places it on a fishing boat somewhere off the coast of Newfoundland

http://twitter.com/dickc/status/2741715930

Listen, I get out of bed on Sunday and put on my driving cap and ascot one at a time just like everybody else

http://twitter.com/dickc/status/2598629056

Former ATT exec now Chairman of GM says company has "for too long ignored the benefits of adding indecipherable surcharges to monthly bills"

http://twitter.com/dickc/status/2569226519

Boy you quit your job and walk around the house in your boxers eating chocolate for just ONE day and suddenly you're "lazy".

http://twitter.com/dickc/status/2561295443

First full day as Twitter COO tomorrow. Task #1: undermine CEO, consolidate power.

http://twitter.com/dickc/status/3962807808

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Skills of great entrepreneurs

Randy Komisar of Kleiner Perkins, in this talk given at a Stanford entrepreneur summit in 2007, says the top tier of entrepreneurs are the ones who can recognize an opportunity and know how to take advantage of it.

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5. Friends, family & fools - I know everybody likes to start by thinking of the 3 F’s, but I dont recommend the first 2 F’s – unless it is your last option.  Keep your friends you friends and your family your family.  If either are sophisticated then I put them in buckets 1-3 but usually they are not. F&F makes it hard to call it quits when you should.  It makes it hard to do downrounds to survive when necessary.  It is even harder to ask them to re-up if you need more cash quickly.  And it makes weddings and bar mitzvah’s a whole lot less fun.

http://www.bothsidesofthetable.com/2009/08/14/angel-funding-advice/

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