• Even if your startup idea has no direct competitors, you probably have some indirect competition.  That is, some other kind of product or service is competing for the same dollars.  For example, even though no one else sells chicken wings in a particular neighborhood, someone may indirectly compete with hamburger and other fast food.

• On the slim chance that you actually have no indirect competition, be mindful that buyers always have the choice of doing nothing.

• Note that investors prefer startups that leapfrog competitors in an established market, and so claiming “no competition” may suggest to them that that no demand exists for the product or service.

• Startups that take on larger sized competitors and succeed may find themselves an acquisition target of that competitor.  That could be an attractive exit strategy.

Now some clever people might reply that government agencies and monopolies have no competition.  Well, perhaps that is so in some instances, but rather few.  FedEx and UPS have shown the Post Office that they can compete quite well with a government agency.  There are few real monopolies any more, and those such as utility companies find themselves heavily regulated.  The point is that competition is not a bad thing at all.  In fact, it is an essential component of the capitalist system.

Competitors keep one another on their toes; forcing producers and suppliers to focus attention on consumer needs.  Every competitive analysis asks why the target market segment buys from company A or company B.  That answer to that question underlies every business success.  Competitors verify the existence of demand, help scope that demand and illustrate ways to satisfy it.  The question is not whether you have any competitors; it is whether you have learned what they can teach you about winning customers.

Nearly every professional manager knows that planning is crucial to business success.  Still, few people actually act on that knowledge.  In over 15 years of helping businesses plan their growth, it has become increasingly clear that only a small percentage of managers draft formal plans in order to create a disciplined strategic road map for success.  Instead, the motive that drives the production of most business plans is the need to raise capital, either bank loans or equity funding.  Everyone has heard some version of the old adage that “Failure to plan is a plan for failure” but few realize the actual consequences of deciding to “get by” without a carefully thought through, written business plan. The statistical evidence of that folly is overwhelming.

The Top Ten Reasons That Businesses Fail

No, this is not one of those David Lederman jokes; unfortunately it is deadly serious.  The business statistics surrounding business failure are widely published.  A Dunn and Bradstreet research report cites managerial incompetence as the cause of 96% of American business failures.  Many Internet sources have their own “Top 10″ reasons for business failure in the U.S. and although they differ somewhat in detail, the vast majority of relate directly to inadequate planning.[1] Here is the Small Business Administration’s rather typical Top 10 list:

1.  78% lack a rigorously-developed business plan keyed to the realities of their market, including sufficient research on the business before launching it.

2.  73% fail because the owner is wildly optimistic about projected sales, break-even point, and capital required.

3.  70% fail because the optimistic owner believes he/she can wing it on important issues with which he/she is ignorant, and ” can’t afford ” to hire the expertise to get it done right the first time.

4.  63% of new business owners simply don’t have the required business experience to make a success of the enterprise.

5.  82% lack cash-flow management skills. They don’t understand the importance of controlling cash flow.

6.  79% launch with a bright idea and little or no capital.

7.  77% don’t have a rationally-developed pricing model for their products or services.

8.  64% don’t have a clue as to how to aggressively promote their business, nor do they understand its importance.

9.  55% don’t understand their competition, or assume it can be safely ignored.

10.  47% rely too much on one customer/client.

Clearly, a rigorous project to write a comprehensive business would reveal most if not all of these top 10 problems in advance.  Especially if the project involved actively seeking criticism of the plan from experienced business people, investors, managers, academics and mentoring organizations such as SCORE and the Small Business Administration.

Don’t Bother Me with Facts

Few operating businesses write plans despite all the accumulated evidence that a written business plan – built on sound market and competitive research and including operational and financial plans – is crucial to business success.  Temple Porter once remarked to me that people only take business planning seriously when business pain forces them to do so.  Foresight simply does not motivate the vast majority of managers.

Mostly at the early stages of business development when businesses need capital and MUST write a business plan to attract investment, or when they require additional financing in later stages, will they grudgingly write one.  Generally, even in those situations entrepreneurs and managers sell their businesses short by producing a document designed more to “sell” outside investors on their idea than to actually plan for their own future success.  They seem to forget that the founders and owners are the people most invested in the business.  Outside investors stand to lose only some discretionary capital: Owners and founders risk years of work, dreams, foregone opportunities, the cost of loans they personally guaranteed, perhaps their business credibility and certainly their jobs.

Every management team can recite a laundry list of plausible sounding reasons not to write a business plan for use a road map for growth.  “Time, resources and money” they will explain, “are better spent on running the business.”  Another familiar favorite is “We have a business plan but it’s not written down.” Yet no one can keep all the details of a real business plan in their head all at once.  So yes, even though 78% of businesses fail due to a “lack a rigorously-developed business plan keyed to the realities of their market” they all have plenty of reasons.  Only the other 22% have decent odds of survival, to say nothing of achieving prosperity.

Business Planning Best Practices

Every business needs to review its business plan annually.  That does not mean that they must right a new one every year, of course; in most cases that would overstate the need.  If a business has a written plan less than three years old, the executive team should review and discuss each strategy in light of the changing market place, available resources and external trends such as those in technology, regulation or demographics.  Management must place special emphasis on updating their competitive analysis and marketing strategies at least every year.  Still, operational plans and financial strategies warrant annual re-evaluation too.  Rather than write a full new plan, management can write an update and add it to the plan.  Update should include new factual findings, the reasons for making changes and specific new strategies and tactics.  When reviewed and approved by appropriate stakeholders, managers should communicate the plan, its central strategies and especially reasons for changes to the company’s employees.  When everyone knows and understands the overall plan, it is much easier to make individual day to day decisions and obtain “buy-in” and the sense of teamwork and shared mission that goes with it.

If your company or start-up venture does not have a business plan, write one immediately.  Spend the time to do it right and completely, with a full analysis of your business model, product or service, target market, value proposition, industry, competitors and financial plan.  If you decide to fly blind instead, in all likelihood you will eventually crash.  Look really hard at those statistics above.

Some years before, a woman had presented an idea for hand-embroidered sneakers as “tapping into the multi-billion dollar shoe market.”  When I questioned whether that figure was genuinely relevant, she noted that athletic shoes accounted for more that a quarter of the total market.  The sample pair that she had with her that day were red with floral embroidery.  In that meeting, we discussed whether investors might be more interested in the market for hand decorated red sneakers than for shoes generally. I came to call her hyped-up market size reference the “Red Sneakers” problem.  I wish that these were the only too examples that I knew about, but unfortunately, the Red Sneakers problem shows up in far too many business plans.

Red Sneakers market descriptions wave a red flag. It suggests that you are given to gross exaggeration, that you simply did not bother to do the necessary research and analysis to determine the size of the relevant market segment and/or that you do not know how to estimate the appropriate niche for your product.  Each of these reflects poorly on the plan and the writer.  The only market size estimate that makes any sense is one determined by the “100% of sales” rule.  How many dollars in revenue would the company produce if it made 100% of the sales in its market segment or niche?  Calculating that figure, even if it relies on a few (explicit) assumptions constitutes some evidence of sound business analysis; offering up overall industry figures is vacuous hype.

Of course, plans that then estimate their share of a Red Sneakers market are guilty of the further offense of “Chinese math.”

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• Taking substantial time away from other responsibilities to concentrate on growth, competitiveness, planning and writing
• Ability to “scope” correctly so that the plan contains neither too much or too little information
• Substantial and relevant research into markets, customers, competitors and industry dynamics
• Credible strategic thinking that sets the direction of major business activities
• Integrating strategies so that all the plan sections fit together logically
• Writing plan sections in clear, concise, grammatically correct language that is lively to read
• Writing with enthusiastiam without over-selling the product, market and business opportunity
• Anticipating challenges to your basic premises about the product, market and opportunity
• Levels of detail and process that typically lie outside an entrepreneur’s comfort zone
• Identifying all the crucial (and tough) strategic choices and making them wisely
• Systematically seeking criticism from skeptics to refine the plan and address perceived weakness
• Reevaluating strategies that others see as weak and deciding whether to change them or not
• Summarizing the most important aspects of the plan in a two-page-or-less executive summary

Difficult as these challenges may be, sound leadership requires that businesses face up to them.  There are good reasons that the old maxim still survives that says ”Failure to plan is a plan for failure.”  According to a U.S. Bank study, 78% of businesses fail because that do not have a well-developed business plan.  At the risk of quoting another ancient truism, “Each hour spent planning is worth two hours saved during implementation.”  Planning pays off better than most management activities and is the most reliable way to improve business performance.  Business gurus continue to recite these old saws because they are true.  Make a detailed plan, write it down, have the smartest people in and outside your organization read it, edit and correct it and then follow it!

… lose the “Chinese math.” Chinese math is the argument that goes like this: If just 1% of the people in China bought a Macintosh, Apple would be the largest computer company in the world. Many plans cite a study that “proves” that a market will be $20 billion by 2003 and state that all the company needs to do to be profitable is to get 1% of the market.

There are problems with Chinese math: 1) there’s never been a consulting study that didn’t predict a multibillion-dollar market size. (Do you think consulting firms can sell studies that predict small or down markets?) 2) Getting 1% of a market is easier said than done. 3) If you say that you need to get only1%, does this mean you’re conceding the 99% to others? 4) You label yourself a bozo because only bozos would try this line of reasoning on sophisticated investors.

Kawasaki’s reason #1 continues to ring true, especially in emerging markets. Still, let’s focus on reasons #2 and #4.  They are closely related.  Reason #4 warns that if your presentation or business plan relies on Chinese math, sophisticated readers will think you are a bozo.  Why? Because of #2!  Naively taking for granted a 1% (or worse yet a 5%, 10% or more) market share simply sweeps the real world difficulties of marketing and sales under a flimsy statistical rug.  Let’s assume that a reasonable case can be made that your market comprises a million individual buyers. Capturing a mere 1% of that market means selling 10,000 customers.  If you enjoy a typical closing rate around 25%, then closing 10,000 sales requires making 40,000 sales presentations to qualified prospects, i.e., people who need what you sell, have the means to buy it and will give you a reasonable opportunity to sell it to them.  To find 40,000 qualified prospects, you may need to start with 100,000+ leads; that is people who express some kind of interest, such as visitors to your web site. 

These numbers put a little flesh on the bare bones of a 1% market share.  How will you attract all those visitors?  Does your business plan have an adequate marketing budget and strategy to reach them?  Does it describe an efficient means to qualify prospects out of the 100,000 leads?  Who in your company will make the 40,000 sales presentations? If it takes 12 minutes to fill out a sales slip and run a credit card, then the 10,000 sales will require 120,000 minutes or 2000 hours … just to cash out all those customers, to say nothing of selling them!  Investors want to know how you plan to do all these things. They will dismiss  an empty market share forecast that fails to comprehend such challenges.  To run your business, you will need to know the answers.  Consequently if your plan forecasts some small share of a large market, discuss that in terms of the actual numbers and how you will capture and service them.

Neophyte entrepreneurs continue to write business plans containing Chinese math.  They submit them to investors and to potential strategic partners and use them to recruit seasoned managers, executives, board members and advisors.  Many entrepreneurs have no idea what role Chinese math has played in the failure of these important initiatives.

1. What’s the business model? Where does the company fit in its industry, who will its customers be, and how will it generate its various revenue streams?
2. What customer or market problem does it address? How much old pain or new pleasure does it provide? Does it solve a critical problem or satisfy a strong desire?
3. How big is the market opportunity; big enough to cover the costs of acquiring customers and providing the product or service at a profit? Is it big enough to build a company around and to interest investors?
4. What’s the value proposition? How powerful is its competitive differentiation with respect to directly and indirectly competing ideas, technologies, products or services?
5. What are the competitive barriers? How defensible is it: will it rely on patents, trade secrets, trademarks, or just being first to market?
6. How strong is the management team’s knowledge, experience and commitment?
7. How does the current operating environment influence the timing for this kind of venture? Assess any relevant economic, demographic, technological and regulatory influences.

But the real issue is content. Business plan software treats all chapters and sections as equal; market size here, target customers there; competition over here. It has all the right buckets. Unfortunately, buckets of arbitrarily parsed information don’t do a great job of story-telling. A business plan needs to get right to the point of this specific business and then back it up with solid evidence and details. Many good ideas never obtain funding or attract other needed resources because they fail to communicate the plan in a way that is clear, effective and impressive. Starting with a generic format cannot help. Each business idea has unique priorities that must drive the presentation of the plan’s content, not some generic, one-size-fits-all format. Too many entrepreneurs learn this lesson the hard way.

Winning requires the right vehicle. Plans that exaggerate markets overstate sales forecasts, over-hype the business idea or underestimate the competition will not cross the finish line. Investors expect an honest, evenhanded assessment of the opportunity and the risks. Hyperbole will not sell them on you or your business. In fact, it may turn them off entirely. Everyone that you might want to “sell” on your idea, including investors, strategic partners, prospective employees, advisors and board members wants to evaluate your plan on the strength of facts, frank assessments and honest analysis.  That is not to say that you should not convey enthusiasm, just don’t overdo it.

An investment grade plan must identify a management team with required core competencies (including as yet unfilled positions). It must engender confidence that management recognizes the predictable business challenges and that it is capable of handling unforeseen contingencies. The marketing section must address thoroughly the target market, analyze relevant trends, set out strategies based on realistic goals for its marketing, advertising and sales and estimate reasonably the cost of customer acquisition. The plan must realistically evaluate the competition (including even quite dissimilar rivals for the target market’s budget line item). It must state clearly how it intends to establish and maintain advantageous market differentiation. A plan must illustrate that the entrepreneur has anticipated competitive reactions that result from own market entry. It must show that management has developed integrated strategies and a comprehensive tactics for staying a step ahead. Management must also show that it can muster all the necessary human and other resources to execute. To pitch professional investors with confidence, plans must include appropriate levels of analysis and detail in a readable, well-organized plan supported by credible financials. If you leave out important parts, your plan will go off the road. If you exaggerate people won’t take you or your plan seriously.

Perhaps the most compelling reason to learn to look at your own venture as an investor would is that you will always be its major investor. Outside financial investors will invest discretionary capital that they can afford to lose. You will end up investing years of your life, enthusiasm, energy and credibility. Your friends, business colleagues, family and many others will either watch you succeed or fail.  You will probably spend a good deal of your own money and make many material and other sacrifices.  If the venture stumbles along for three to five years, it is likely that you will be the first one in and the last one out. No one has more invested in your start-up than you do. The years, money, self-esteem, sleepless nights, personal reputation and spirit that you put at risk is a huge investment.

The first step in the process is to stop focusing on the great new product or service that you dreamed up and shift to laser sharpness on whether and exactly how a company built around such a product would make money. Learn to question your assumptions and seek proof as professional investors surely will. Have you adequately laid out the business case?  Have you accurately estimated the market or have you made the Red Sneakers mistake or used Chinese Math?  Will people actually want what you sell enough to spend the amount you need to yield a profit? How much must they spend for a competing product? Do you have solid figures to back up the cost of making the product, acquiring customers and closing sales?  Great ideas are a dime a dozen. Businesses succeed by executing well on sound business strategies. Can you demonstrate that your management team has the vision, skills and relevant experience to do that?

These are hard questions indeed, but you need to ask and answer them to protect your investment.  If you fail to ask them now, it is very likely that you will wish later that you had paid them more attention. Moreover, if you think these things through carefull before an outside investor asks about them, you will not only be prepared, but you will see the importance and relevance of the questions much more clearly.