What Are the Essential Components of a Business Plan?

As I prepare to mentor teams from MIT Sloan as part of the Business Plan Contest of its 100k Competition this month, I was thinking about what companies need to produce.  Business plans out there vary from a single page summary to an excruciatingly long dissertation.  The key to a good business plan is to only have the information you need and forget the rest.  Easier said than done though. However, here are some thoughts for companies as they are preparing their plans.  You can see an overview from some very recognizable entrepreneurs in this video.  The entrepreneurs here stress that the market itself, due primarily to the growth of the Internet, is different today than it was in the past, so the model for preparing a business plan is different.  The key is to know the market and have a good idea.  As Marc Andreessen, founder of Netscape turned venture capitalist, notes:

The process of planning ... is very valuable, but the actual plan that results from it is probably worthless.

And as summed up by Kevin Ryan, CEO of DoubleClick, the questions you have to ask to create a good business plan are (1) is this market big enough, (2) do we have a good idea, and (3) do we have good people.

So what should be included?

HubSpot founders Brian Halligan and Dharmesh Shah also have abandoned the large, detailed business plan because once you start showing it to investors, it won't last.  If you have put all of this effort into a 50-page business plan, you either have to throw much of it out as it evolves, or you will be so invested in it that you won't want to change the plan.  Neither result is a happy one for an entrepreneur.  They prefer to think of the "business plan" as a set of three items:

  1. a PowerPoint deck describing the business and team
  2. An executive summary of the target market and business (see more below)
  3. A three-year pro forma profit & loss document

In the early stages of development and the first round of financing, investors are mostly looking at the team and what they are going to do.  It is only when you get into the later stages of financing that detailed financial data become important.  So focus on the market and the concept rather than getting lost in a complicated document.

For the summary, investors will be looking for the following:

  1. The Team.  The people who will be running the business and developing the product are key.  The best startup teams will feature a mix of strengths working together.
  2. The Market.  You need to describe the size of the target market and the environment to show that you will have customers and they are currently being underserved.  However, no business plan should say that the market is unlimited and there no competitors.  Be realistic.
  3. Your Product.  What is unique about the product or service you are providing.  If you have trouble describing it, you will have trouble with Item #2.
  4. Money and Forecasts.  Give a reasonable view of what you expect your financials to look like for the next few years (again, understanding that this estimate will change) and provide guidelines of what you see as development and customer relationship milestones to meet along the way.

See my previous post for another perspective.

The key to all of this to show that you have thought through your plan realistically but are ready to adjust when it inevitably changes.

What has been your experience with preparing business plans?  What have you found works or does not work?