Secrets to STARTUP SUCCESS

THREE VENTURES, THREE APPROACHES

In thinking about your approach to planning, consider the maturity of your venture. How fully developed is your product or service? Do you understand customer receptivity and demand? Do you know what will be required to successfully bring your offering to market? The underlying issue here is the relative number of knowns vs. un­knowns: the more predictable your path forward, the more valuable a detailed, written business plan becomes. To illustrate, here are three quick examples:

DECISION ONE MORTGAGE - While he was incubating his startup idea as a senior leader at First Union, J. C. Faulkner knew that his new mortgage venture would target a well-known core need (i. e., home ownership) with well-established products in a rapidly growing mar­ket that he deeply understood. He had built successful mortgage shops and had been through many rounds of annual sales and cost projec­tions. He knew the kind of people he would need and what he would pay them. He could accurately estimate an overall cost structure. In short, although he would encounter the unpredictable twists and turns all entrepreneurs do, he faced more knowns than unknowns. For all these reasons, he developed a thorough business plan with detailed financial projections over a three-year period to give himself a high- confidence roadmap for raising capital and growing the business.

MODALITY - At the time of his first round of funding, Mark Williams was dealing with uncertainty by the bucketful. He was still in a prod­uct development mode, having tested a raw concept with medical students and possessing what he hoped was a fairly mature prototype. He couldn’t yet produce, sell, or deliver anything of substance. And his hypothetical customers swirled about in a poorly understood, just-emerging market. Even if he could identify the right users, he had no reliable distribution channel for delivery of the product (re­member, this was pre-iPhone, pre-AppStore). And he still lacked the formal blessing of his most important partner, Apple Computer, as he patiently built relationships within the company in hopes that it would not crush him like a bug.

In the summer of 2006, Mark’s attorneys developed a private placement memorandum (PPM), a standard fund-raising document outlining for prospective investors what Modality was all about. It in­cluded high-level information about the product idea, the assumed market need, existing licensing agreements, points of risk, and so forth. Only a single page in the eighty-page document dealt with financial forecasts, using a very simple chart with assumed prices, sales, costs, margins and some projected earnings per title figures. According to these projections, the company would produce and release 400 titles by the end of 2007, earning an annual average of $8,260 for each title. Total company profits were not included, but an investor could easily calculate Modality’s rough projected earnings to exceed $3 million for 2007. Mark and his team knew that these projections were indeed rough. In fact they were guesses, based on little factual data and a raft of assumptions. As the PPM affirmed in understated fashion, “the for­ward-looking information provided in this Memorandum may prove inaccurate.”

Because of the high levels of uncertainty at the time, Mark’s plan­ning approach was to continually sharpen priorities, in order to stay focused on a small set of mission-critical tasks. No formal business plan here. Just all hands on deck, pinching pennies, 24-7, with each month bringing a new make-or-break challenge. Everyone’s effort and attention was on the very next task that would take Modality toward that landmark day when revenue would begin to flow.

THE IVEY - In Lynn Ivey’s case, she and her financial modelers applied later-stage planning approaches and financial assumptions to an un­proven, early-stage concept. Based on her first business plan, devel­oped for investors in the spring of 2006, The Ivey seemed like a mature concept ready to go to market with a high degree of certainty. Lynn had a compelling and clear vision of her product, business model, and client base. She was confident that she could quickly fill up the facility with members. Her information packet for investors contained ten years of financial projections with annual revenues, cash flows, earnings, and rates of return.

The fact that her plan included the development of a high-value real estate asset in a preferred area of the city gave investors confidence, and it also drove her financial forecasting. She started with the total up­front cost of the building, added to it the overall cost structure required to operate a world-class service from it, and worked backward to create sales projections that would guarantee an acceptable path to profitabil­ity. Lynn’s attitude at the time was, “Whatever it takes, we can do it.” But in reality, just like Mark Williams, Lynn was in the earliest stages of product development and gestation, facing many unknowns. In one sense, the most predictable aspect of her vision, the building, didn’t matter. Her real product would not be the physical facility, but rather the services that would flow out of it, and, on this front, she had no factual evidence that her service concept was viable. She was trying something that had never been done before, and no amount of plan­ning or projecting could accurately predict in advance how the service would play out in the real world. Looking back now, Lynn wishes she had invested more of her upfront money in more thoroughly investi­gating the market for an upscale adult daycare service, finding ways to test her concept before committing to millions of dollars of fixed costs. Depending on how her early experimentation went, she might have delayed construction in order to more fully prove her concept. She might also have been able to utilize her personal savings (she in­vested more than $400,000 into the company) in a low-cost pilot ap­proach that may have gained enough traction to remove the need for outside investors. Or, at a minimum, this path would have helped her establish more realistic sales projections, based on actual market re­sponsiveness instead of on a grand vision, and allowed her to plot a more steady, realistic path to profitability.