By Scott Abel and Justin James
Editor's note: This is part two of a three-part series written by Spiceworks' CEO, Scott Abel, and TechRepublic contributor Justin James. Although this article is co-authored, "we" refers to Abel and his business partners, not Abel and James. This article is also available as a PDF download.
The previous article in this series discussed how to begin the process of launching a tech company and how to determine which of your ideas are most likely to fly. It mapped out four steps for getting underway and discussed the "idea percolator," which is a way of analyzing the viability of a potential product or service. Now it's time to take the next step and see how to put together a business plan that defines the way you'll build and market your product—and how to raise the money you'll need to fund your new venture.
The business plan
You've come up with the next big killer idea. You've hammered out the concept and it survived. You know what you want to go do. There's only one thing missing: money! No matter how you plan to raise money, whether it's from friends and family, through a small business loan, angel investors, or venture capitalists, they'll all want to see the same thing—a business plan that spells out how you plan to build your product, take it to market, and eventually make a profit
Many people recommend writing a 25- to 30-page document that spells all this out in detail. I'm not a big fan of that approach. Instead, I recommend coming up with seven or eight slides that outline your business plan in presentation form. Why do it this way? It kills two birds with one stone. You need a presentation to give investors anyways. In addition, putting together the presentation first helps you refine the plan. You'll learn something every time you pitch the idea, and this format makes it easy to incorporate what you've learned into your plan.
What topics should the presentation cover? You guessed it: The four steps from your strawman plan answer most of what you'll need:
- Pick a market
- Identify a need that isn't met
- Create a solution that actually solves a problem
- Make sure it's a big problem
(For more on these steps, see the previous article.) That's why you did them! You'll also need some background information on the founding team, how you plan to take the product to market, and an 18-month summary of company financials. Again, try to limit each topic to one slide. The final plan should have one slide that covers each of the following topics:
- The founding team
- The problem you solve
- The solution to the problem
- Your unique approach
- How you'll take the product to market
- The competitive landscape; who you'll compete against
- Summary of company financials
This should provide all the information an investor needs to decide at a high level whether they're interested in investing in your company. If you'd like a tutorial on how to do this right, check out Guy Kawasaki's book The Art of the Start. He does a great job of outlining what you should do and why. It's an excellent book for anyone thinking of starting a company.
The business plan is ready. You've got your pitch down. What next? It's time to go out and raise money. Maybe you're one of the lucky few that can self fund your idea/company, but most of us have to raise money from outside investors. As I mentioned above, there are lots of ways to do it. Most of my experience has been limited to raising venture capital, so I'll stick to that topic. That doesn't mean there's anything wrong with the other mechanisms—in fact, some would say that they are better ways to raise money. It's just that I've never done it that way, so I can't speak intelligently about it. I'll stick to the one I know.
The first thing to understand about venture capitalists (VCs) is that they are in the people business. They don't back ideas, they back people. Why is that? Because starting a new business is a highly volatile affair. It's likely that the initial idea they fund isn't the idea that will ultimately be successful. It's not uncommon for both the product and business model to morph several times from when a company is started until when it becomes "successful." (In the eyes of a VC, "success" means a liquidation event; the company either gets bought or goes public.)
So what does all that mean? VCs care more about the founding team than they do about the idea. Who are the founders? What is their track record? Have they done something like this before? What are their areas of expertise? Does the team have any big holes?
The second thing to know about VCs is that they're always trying to minimize risk. Hence, the focus on "a team" of people and not just one individual. More than one founder reduces risk. It brings more skills to the table, it shows a willingness to cooperate and share ideas, and it increases the breadth of experience. All of this reduces the risk for the VCs.
Obviously, this is all easier if you already have a relationship with a VC. That's why you see the same entrepreneurs go back to the same VCs over and over again. Once they get a good working relationship, it's not worth the hassle and risk of breaking in somebody new. The devil you know is better than the one you don't.
When it comes time to pitch your idea, stay focused on the problem you solve and how you solve it. This is the linchpin of your plan. No problem to solve, no business. What about new technology? Technology is great, but only if it solves a real problem. Technology in search of a problem to solve rarely (if ever) turns into a successful business. Solve a user's real problem, and the world will beat a path to your door. If not, well, now you know why they call it "venture" capital.
Another hint for dealing with VCs: Keep your business model simple. Although "new business model" sounds sexy, remember that VCs don't like risk. For them, "new business model" translates into "never been done before, so it probably won't work." That's not to say it will never work, but at the end of the day, there are only so many ways to make money. You're probably better off if you pick one of those and stick to it. You can still innovate. Maybe you can pick an existing model and apply it to a different category. That's what Spiceworks did. We took the advertising model that was used in content Web sites and applied it to an enterprise application. It's still too early to see how it will all play out, but at least the VCs had a model they could understand.
The final installment will look at how you actually build the business—from hiring the best startup team to creating a product that addresses a real need in the market.
Scott Abel has started three software companies over the past decade and previously worked for industry leaders such as Apple, NeXT, Motorola, and Apollo in sales and engineering. He is co-founder and CEO of Spiceworks, which developed the first free IT management software to help IT professionals in small and midsize businesses easily inventory and manage the software and hardware assets in their networks.
Justin James writes in TechRepublic's Programming and Development blog. He also contributes articles on a wide variety of topics, from graphics programming in .NET to building and configuring SOHO router/gateway appliances.