Writing New Venture Plans for Implementing with QuickBooks - dummies

Writing New Venture Plans for Implementing with QuickBooks

By Stephen L. Nelson

New venture plans answer five basic questions, which provide prospective investors the necessary information to determine whether they should further investigate your venture as a possible investment.

Is the new venture’s product or service feasible?

In some cases, this question is unnecessary to ask. However, it’s important to consider in any case in which a firm may invest in a new, unproven idea. This situation is most clearly illustrated in the case of a firm that plans to build and then market some newfangled technology. For example, if you’re thinking of starting a firm that will produce a better mousetrap, a key question to ask is whether you really can build a better mousetrap.

You can answer this question in a couple of ways, practically speaking. Obviously, the best way to answer this question about feasibility is to build the better mousetrap first. Having built the better mousetrap, you’ll find it easy to prove to prospective investors that yes, the product is feasible. You can set your mousetrap on the desk and demonstrate how it works.

If a product hasn’t already been built or a service hasn’t already been proved to be deliverable, the next-best approach — and the one commonly used by technology start-ups — is to assemble a team of people who’ve built similar products in the past. The logic of this approach is that if you have a team that has built similar technologies in the past, investors can probably rely on this team’s track record of success.

Does the market want the product or service?

Assuming that you do have a firm with a practical, feasible product or service, you need to ask another big question right up front: Do people really, truly want the product or service? Is there public demand for the firm’s offering? Ideally, a new venture proves that demand exists by already having customers buying the product.

If a new venture hasn’t yet finished the product or service, such hard-and-fast proof of demand is impossible to come by. In this case, you have another option: You can prove market demand by running independent market research studies to say, “Yes, we’ve run several focus groups, and people say they’ll buy a better mousetrap.”

Sometimes, you can also prove market demand by showing that consumers or businesses already purchase a similar product or service and would, logically, purchase a clearly improved version of the product or service. For example, in the case of the better mousetrap, people are already buying a lot of mousetraps. So if you truly did build better mousetraps, you could pretty much prove market demand by demonstrating the new product’s superiority.

However, you need to be very careful about this issue of market demand, because it’s all too easy for entrepreneurs and inventors who are excited about some new technology or some new product or service to assume that consumers really will want the new thing that is being built or offered. Consumers are notoriously fickle. What seems like a wonderful innovation to the entrepreneur or inventor often isn’t so wonderful in the eyes of the consumer.

Can the product or service be profitably sold?

Okay, the first two questions ask whether a product or service is feasible and whether people want the product. Is that enough? No, actually it isn’t. The third, critically important question is whether the product that you’re selling can be sold profitably.

You must run rough numbers to prove that products or services revenue less the cost of goods sold produces a gross margin that is adequate not just to pay the operating expenses of the firm, but also to retain something for profit. This proof that the firm can profitably sell its product or service is really achieved by the business pro forma financial forecast. This forecast proves that the firm can be profitable by selling the product or service.

Is the return on the venture adequate for prospective investors?

A firm also needs to deliver profits at least equal to and, ideally, in excess of the return on investment that the investors desire. In the case of a new venture, investors have pretty firm expectations of what a risky investment should deliver.

Angel investors commonly require rates of return in the neighborhood of 20 to 25 percent annually. Small-business entrepreneurs and business owners often require similar rates of return. Institutional and professional venture capital investors often require annual rates of return of 45 percent to 55 percent — or even 65 percent annually.

If you think about what all this means, you can quickly see that even a pretty darn good business that delivers the 30 to 35 percent annual rate of return — and that’s really good if you think about it — won’t be enough for some investors. An institutional venture capital investor who needs, for example, a 50 percent annual return on his investment isn’t going to look seriously at anything that produces only a meager 30 percent annual return.

Essentially, in a new venture plan, you provide information that lets the prospective investor figure out the rate of return. Then the prospective investor can compare this return with his or her requirements.

Can existing management run the business?

Even if you have a venture based on a feasible product or technology, even if you have customers who are hysterically excited to purchase your product, even if you have a product or service that will bring in a massive profit, and even if your investors will be able to earn a wonderful return on their investment, that’s still not enough. A new venture plan must ask and answer one other critical question.

Any new venture plan needs to sell prospective investors on the idea that the existing management team — which includes the founder or president and his or her lieutenants or vice presidents — can successfully operate the business. In other words, even a great business opportunity requires a good management team in place (or almost in place), ready to execute the business plan.