BUSINESS PLAN ortant area in the realm of risk/ capital is often m able," risky,as I've noted;what can go wrong will.When they mear he company be taken pub hat appens,unsophistica investors panic,get angry so would reveal information that might harm its roll up their sleeves and help the company solve its problem theyvehad experience sav ae.They umderst ta companies,but rather they are not sustainable as indepen- The best business is a post of the process.How will the investor office box to which people eventually get money out of the send cashier's checks. busine only marg articularly like ss strategy and a strong tactical plan.they knov atwiefxitionThe howtcmotivatteam members.They are also familiar with the Byzan those opt ine ins an corporations that could someday actually buy know-how is worth the money needed to buy it. them.Investors feel a lot better about risk if the There is an old expression directly relevant to is discussed up front.There is an neurial finance: Too clever by half."Often off and get very cre trepreneurial strategies kno n craft just the opposite is true: My experience has prov en again and again that sen you had better know where you might end up and le deals have the following six characteristics: ere.A business plan hey are simple every traveler knows,a journey is a lot less risky Thev emphasize trust rather than legal ties when you have directions. They do not blow apart if actual differs slightly The Deal and Beyond e pervers s tha They are written on a pile of papers no greater That is a topic for another than one-quarter inch thick article in its utI will add a wwords here. rules miss an impor to finance an sition the valuation and terms of the deal they will re of a lump sum.Instead,it is incumbent upon entre ceive. Their explicit goal seems to be to minimize ding,to phatuiovthe l suffer in raising capital.Im about capita cquisition as a dynami main as passive as a tree while the ed and when they will need it. n money building their business.On the food chain of in How is that accomplished?The trick is for the vestors,it seems,doctors and dentists are best and h arge share of the returns. group to test the product,build a protot and hat notion-like the idea that excruciatingly de atch it perfo ed financial projections are useft HARVARD BUSINESS REVIEW July-August 199 107 BUSINESS PLAN Finally, one important area in the realm of risk/ reward management relates to harvesting. Venture capitalists often ask if a company is “IPOable,” by which they mean, Can the company be taken pub￾lic at some point in the future? Some businesses are inherently difficult to take public because doing so would reveal information that might harm its competitive position (for example, it would reveal profitability, thereby encouraging entry or anger￾ing customers or suppliers). Some ventures are not companies, but rather products – they are not sustainable as indepen￾dent businesses. Therefore, the business plan should talk candidly about the end of the process. How will the investor eventually get money out of the business, assuming it is successful, even if only marginally so? When professionals invest, they particularly like com￾panies with a wide range of exit options. They like companies that work hard to preserve and enhance those options along the way, companies that don’t, for example, unthinkingly form alliances with big corporations that could someday actually buy them. Investors feel a lot better about risk if the venture’s endgame is discussed up front. There is an old saying, “If you don’t know where you are going, any road will get you there.” In crafting sensible en￾trepreneurial strategies, just the opposite is true: you had better know where you might end up and have a map for getting there. A business plan should be the place where that map is drawn, for, as every traveler knows, a journey is a lot less risky when you have directions. The Deal and Beyond Once a business plan is written, of course, the goal is to land a deal. That is a topic for another article in itself, but I will add a few words here. When I talk to young (and old) entrepreneurs looking to finance their ventures, they obsess about the valuation and terms of the deal they will re￾ceive. Their explicit goal seems to be to minimize the dilution they will suffer in raising capital. Im￾plicitly, they are also looking for investors who will remain as passive as a tree while they go about building their business. On the food chain of in￾vestors, it seems, doctors and dentists are best and venture capitalists are worst because of the degree to which the latter group demands control and a large share of the returns. That notion–like the idea that excruciatingly de￾tailed financial projections are useful – is nonsense. that happens, unsophisticated investors panic, get – sible deals have the following six characteristics: � � � � � � tant point. A deal should not be a static thing, a one-shot document that negotiates the disposition think about capital acquisition as a dynamic need and when they will need it. How is that accomplished? The trick is for the The best business is a post From whom you raise capital is often more impor￾tant than the terms. New ventures are inherently risky, as I’ve noted; what can go wrong will. When angry, and often refuse to advance the company more money. Sophisticated investors, by contrast, roll up their sleeves and help the company solve its problems. Often, they’ve had lots of experience sav￾ing sinking ships. They are typically process liter￾ate. They understand how to craft a sensible busi￾ness strategy and a strong tactical plan. They know how to recruit, compensate, and motivate team members. They are also familiar with the Byzan￾tine ins and outs of going public an event most en￾trepreneurs face but once in a lifetime. This kind of know-how is worth the money needed to buy it. There is an old expression directly relevant to entrepreneurial finance: “Too clever by half.” Often, deal makers get very creative, crafting all sorts of payoff and option schemes. That usually backfires. My experience has proven again and again that sen￾They are simple. They are fair. They emphasize trust rather than legal ties. They do not blow apart if actual differs slightly from plan. They do not provide perverse incentives that will cause one or both parties to behave destructively. They are written on a pile of papers no greater than one-quarter inch thick. But even these six simple rules miss an impor￾of a lump sum. Instead, it is incumbent upon entre￾preneurs, before they go searching for funding, to process – to figure out how much money they will entrepreneurial team to treat the new venture as a series of experiments. Before launching the whole show, launch a little piece of it. Convene a focus group to test the product, build a prototype and watch it perform, conduct a regional or local rollout of a service. Such an exercise reveals the true eco￾office box to which people send cashier’s checks. HARVARD BUSINESS REVIEW July-August 1997 107