o 6 jectiv e 5

Ma.c/itz-y- th-iJ e-h-apte-'1-, pou ;h-oulcl !Je u-6/e to:

1 Explain the difference between human capital and
social capital and indicate why the founding team of
new ventures should be high in both.
2 Explain why it is often better for entrepreneurs to
work with cofounders who have different experience,
training, and skills than they do, rather than cofounders
who are similar to themselves in these respects.
3 Describe a new venture's board of directors and
explain how this board can assist the founding team.
Describe other sources of help and guidance for the
founding team; be sure to include boards of advisers,
employees, investors, consultants, and government
programs.
4 Explain why a growing number of employees is not
necessarily a sign that a new venture is successful.
5 Explain why it is useful for cofounders to have clearly
defined roles in their new venture.
6 Define the self-serving bias and explain how it plays
an important role in perceived fairness.
7 Explain the difference between constructive and
destructive criticism.
8 Define stress and describe several techniques
entrepreneurs can use to reduce stress and its
adverse effects.
135
136 PA T l Assembling the Resources
. .
"fwo are better than one; . . . if they fall, the one will lift up his fellow: but woe to him
that is alone when he falleth; for he hath not another to help him up.
. . .
Do you agree? ls there really strength in partnership?
though-the popu_lar view of entrepreneurs suggests
theytend to be "ioners" who prefer to do things in their
. own unique way; the fact is that most new ventures
(rrlore thal1 two-thirds) are started by teams of entrepre-
neurs woii<ing together.
1
This finding is not surprising:
Cooperation and teamwork confer many benefits, often
. helping iridividuals to accomplish tasks they could not
complete alone. ut working with others, like many .
. . . . .
aspects of life, has a "downside" as weil as a potential
"upside;" lt can, irideed, help entrepreneurs to reach
their dreams by combining the talents, energy, and good
judgment of several individuals. But in other cases, it can
prove harmful-especially if the entrepreneurs in question
experience major disagreements or conflict.
2
So, the
question, "Are entrepreneurs better oft founding new
ventures alone or working with cofounders?" has no
simple answer. Rather, the outcomes depend on how
weil founders choose one another and how weil they
then work together.
Here's an example of the upside of having cofound-
ers. ln 1999, two bright, energetic people who had not
previously met were attending a conference on advances
in biotechnology. One was an M.D. who specialized in
treating cardiovascular diseases, while the other had a
Ph.D. in bioengineering and an MBA. When they met,
they quickly realized that they had both been thinking
about starting a biotech company of their own-a
company based ori new techniques for .. developing
effective Within a few short months, they had
formed a close working relationship and decided to
proceed. ln a sense, it was a partnership made in heaven.
The M.D. was a true expert in several diseases, espe
cially ones known as "orphan diseases"-illnesses that
-Hebrew Bible
are fairly rare and, because of this fact, are below the
radar of (arge drug companies, who don't believe it is
worth developing drugs to treat them. The Ph.D. in
bioengineering had expertise in the engineering .and
production aspects of biotechnology, and also, because .
of his business education, had a good understanding of
basic business principles and practices. They soon
formed a company known as Myomatrix-a company that
was so successful that just a few years later, it was
purchased by. a much !arger biotechnology company,
Cytopia, (see Rgure 5.1 ). The two founders of Myomatrix
continue to work together, now as highranking employ-
ees of the larger company. 8oth found the experience of
their collaboration so positive, that they are seriously
considering founding additional companies.
Figure 5.1 A "Dream" Founding Team
When Lawrence Zinsman, M.D., and Shreefal Mehta, Ph.D., MBA,
met, they soon realized that tagether they represented a valuable
array of skills, experience, and training-key ingredients in
founding a successful biotechnology company. They acted on this
belief. and soon founded Myomatrix, a company that made so
much rapid progress, it was soon purchased by a (arger biotech
company.
What does this example of a successful start-up company suggest? To us, the
key task facing entrepreneurs is not in deciding whether to start a new
venture alone or with several other cofounders; as we noted earlier, most
new ventures are actually started by founding teams-several individuals
who work tagether to launch a new venture. Rather, this example suggests
clearly that the key tasks entrepreneurs confront are actually the following:
(1) choosing cofounders wisely and weil, (2) securing the help and guidance
C HA PT ER 5 Assembling the Team: Acquiring and Utilizing Essential Human Capital 137
of others outside the founding tearn who can assist the new venture to attain
its goals (key ernployees, a board of directors, a board of advisers, etc.),
and (3) developing strong working relationships within the founding tearn
and between the founding tearn and other people. In other words, the success
of any new venture is strongly deterrnined by the quality of the human capital
it assernbles-the knowledge, skills, talents, abilities of its cofounders
and ernployees, and also the social capital these individuals possess-their
reputations, social networks, and relationships with others.
3
In this chapter,
we'll focus on issues relating to this key aspect of the entrepreneurial
process.
4
First, we'll exarnine the founding tearn focusing especially on aspects of
their e x ~ e r i e n c e and skills that allow thern to contribute to the new venture' s
success. In this context, we'll consider the question of whether founders
should be sirnilar to one another in background,. training, and knowledge, or
perhaps different. Second, we'Il exarnine the role of people outside the
founding tearn-rnernbers of the new cornpany's board of directors, advisers,
and key ernployees.
Third, we'Il consider the issue of establishing effective working relation-
ships between cofounders and new ernployees. This task requires such
prelirninary steps as establishing a clear division of roles and obligations, plus
careful attention to basic principles of fairness and effective comrnunication.
Good working relations arnong the founding tearn rnernbers and between the
founders and ernployees, the board of directors, advisers, and others provide
an irnportant foundation of any new venture's growth, so assuring that these
exist is a crucial task for entrepreneurs. Finally, we'll consider irnportant ways
'of protecting the new venture's rnost precious human resource--its found-
ers-from the potential ravages of sornething that can put them in serious
danger-extrernely high Ievels of stress. All too often, entrepreneurs seem to
assume that they are indestructible and that their health can absorb virtually
anything without harm. In fact, though, prolonged exposure to high Ievels of
stress can be truly dangeraus to almost anyone, so it's irnportant for
entrepreneurs to be aware of this fact and to take active steps to protect
themselves from its negative effects-not just for their own good, but for that
of their new ventures, too.
The New Venture Team:
Foundation for Success
The founding team of any new venturc is, in a sense, the key human resource
with which it begins. Ultimately, it is the skills, knowledge, energy,
judgment, and creativity of the new venh1re's founders that initiate and
underlie the entire entrepreneurial process. Because this resource is so
precious, it is important that it be as strong as possible. But what, specifically,
does this irnply? Research on the effects of founding teams on the success of
the companies they launch
6
has helped identify several factors that are
especially important-key ingredients in the success of alrnost any new
venture.
One of these factors is the prior experience of the founding tearn. Have they
worked in this industry or rnarket before? Have they ever started or run a
cornpany-in other words, do they have previous entrepreneurial experience?
The greater their relevant experience and knowledge, the rnore likely they
are to launch a successful new venture because they begin with a greater
understanding of the markets they will serve and the challenges they will face.
138 P , R. T l Assembling the Resources
Figure 5.2
Sociaf Networks and
Entrepreneurial Success
Research findings indicate that
the greater the extent to which
entrepreneurs can draw upon social
sources of information (mentors,
informal industiy networks, people
they meet at professional Forums
such as conferences), the more
successful they ute ul rl!wgniLing
opportunities for new ventures.
Having a rrienlor
Having a broad,
i n f o ~ a l industry nelwork -
Parficirating in
conferences and
other professional forums
Source: Based on Ozgen & Baron, see note 8.
So, founding teams should, to the extent this is possible, have appropriate,
relevant experience. Venture capitalists look for such experience and often
require _ it before making an investment.
Similarly, because much of the information entrepreneurs need is
supplied primarily by other. people, another key factor for founders is
having a broad and well-established social network. Countless questions
arise quickly once a new venture is launched. Many of these issues cannot
be readily anticipated. For this reason, having a broad and strong social
network can be tremendously helpful to entrepreneurs, allowing them to
simply pick up the phone to obtain some of the information they want-or
at least, to identify ways of acquiring it. Research Eindings indicate that the
broader entrepreneurs' social networks, and the more they are "connected"
with other people in their field or industry, the more opportunities they
identify and the higher the quality of these opportunities.
7
For instance, in one
recent study, entrepreneurs who had recently founded information tech-
nology companies responded to a survey posted on an Internet site.
8
The
survey obtained information on the extent to which the entrepreneurs
had mentors (experienced individuals who had helped them in their
careers), the extent to Which they had an informal industry-based network
of social contacts that provided them with useful information, and the
extent to which they attended conferences and other professional forums. It
was predicted that the more entrepreneurs reported having-and using-
these three social sources of information, the better they would be at
recognizing opportunities for new ventures. As shown in Figure 5.2, this result is
precisely what was found. These and related findings
9
strongly suggest, to the
extent the members of a founding team of entrepreneurs are well-connected
or networked, the greater the chances that the new venture they launch
will succeed.
Additional factors of considerable importance relate to the specific skills
and characteristics of the founding team members. Every founding team needs
at least one good communicator-one member who can make a strong and
persuasive presentation to customers, venture capitalists, suppliers, and
others. And every founding team needs at least one person who is simply
"good with other people"-someone who possesses a high Ievel of what has
been described as social competence, or the ability to get along well with others
and form effective relationships with them.
10
Aside from these general skills and abilities, it is also useful for founding
team members to have a broad range of knowledge and a wide range of
more specific skills. For instance, as we'll notein a later chapter, someone on
the founding team should know about government programs designed to
assist new companies (see Chapter 4), and someone should have a basic
knowledge of legal and ethical issues relatP.d to dPaling with employees (see
Chapter 12).
Finally, of coursc, thc personal characteristics of founding team m.embers
are important. In this respect, growing evidence indicates that a set of character-
istics known as the Big Five dimensions of personality
are related to success in a wide range of contexts. Here is a
brief description of these dimensions:
1. Conscientiousness. The extent to which individuals
are organized, dependable and persevering rather
than disorganized, unreliable, and easil y
discouraged.
2. Agreeableness. The extent to which individuals
are cooperative, courteous, trusting, and agree-
able versus uncooperative, disagreeable, and
argumentative.
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C HA PT ER ::: Assembling the Team: Acquiring and Utilizing Essential Human Capital 139
3. Openness to e:xperience. The extent to which indi-
viduals are creative, curious, and have wide-
ranging interests versus being practical and having
narrow interests.
4. Extraversion. The extent to which individuals are
friendly, sociable, and outgoing rather than
reserved, quiet, and shy.
5. Emotional stability. The extent to which individuals
are anxious, emotional, and insecure versus calm,
self-confident, and secure.
Research indicates that these five dimensions are
very basic ones; in fact, we can frequently teil where
others stand on each of these dimensions, often after
interacting with them for just a few minutes.U But
what do these dimensions have to do with the success
of new ventures? Growing evidence suggests a simple
answer: quite a Iot. For instance, the higher entrepre-
neurs are in conscientiousness (being organized, reliable, and persevering),
the more likely their new ventures are to survive.
12
Other findings indicate
that the higher entrepreneurs are in extraversion, the greater the financial
success of their companies and the Ionger these new ventures survive.
13
Finally, recent findings indicate that entrepreneurs tend to be higher in
conscientiousness, openness to experience, and emotional stability, but lower
in agreeableness, than managers.
14
In short, the personal characteristics of
founding team members do indeed matter and often play a role in the
success of the ventures they create. (Please see Figure 5.3 for an overview of
the factors discussed so far-factors that contribute to the strength of the
founding team and to its likelihood of success.)
ffUinJ:i)'t CUf?itd and 5odat CUf?dat: K:er;- ?Zewwtces
6p- the 7Mvn
Have you noticed an underlying theme in this discussion? If not, here it is,
stated explicitly: the founding team of a new venture serves as its store of
two precious resources: human capital (the new venture's starting "bank-
roll" of skills, knowledge, and abilities) and social capital (the ties founding
members have with others, the benefits they obtain from these relationships,
their reputations, and the social networks they bring to the new venture). In
other words, the founding team (and initial employees) is the source of whal
the new venture knows, and also, in a sense, who it knows. The broadcr and
rkher Ulls soun.:l:! uf bt!llt!r it is .fur the new venture. Existing
evidence indicates-and not surprisingly-that the higher the new venture's
human capital and the higher its social capital, the more likely it is to
succeed.
15
research findfug suggest that the higher the founding team' s social
capital, the more likely it is to discover potentially valuable opportunities and
to develop them.
16
So clearly, human capital and social capital are precious
resources entrepreneurs should seek to mcudmize. And that, in turn, raises a
key question: How should entrepreneurs go about doing this? More specif-
ically, how should they choose cofounders? Common sense offers the
following answer: "Choose partners similar to yourself-you will understand
them and get along with them better." Is this true? We'll now take a closer Iook at
this suggestion and the complex issues it raises in the Qualifying Common Sense
section on the next page.
Figure 5.3
The Founding Team: Some Key
Strengths
T o the extent the founding team
of a new venture possess these
characteristics, it may gain
important advantages in terms
of its future success.
learning 1
objective
Explain the difference
between human capital
and social capital and
indicate why the founding
team of new ventures
should be high in both.
learning
objective
2
Explain why it is often
better for entrepreneurs
to work with cofoun-
ders who have different
experience, training, and
skills than they do, rather
than cofounders who are
similar to themselves in
these respects.
140 Assembling the Resources
Colrtlii?Jh-
_ 7C'tzt/W a61/ut ['nt'l '),enettH -and trhat 'l1l 7Ze - Do 7C'tztJt!J
nlt's usually best to choose partners
similar to yourself .. "
lt is a basic fact of life that people feel most
comfortable with, and tend to like, others who
are similar to themselves in various ways. ln fact,
a !arge body of research evidence points to two
intriguing conclusions regarding the appeal of
similarity: (1) almost any kind of similarity will
do-similarity with respect to attitudes and
values, demographic factors such as age,
gender, occupation, or ethnic background,
shared interests-almost anything; and (2) such
effects are both general and strong. For in-
stance, research shows that similarity influ-
ences the outcomes of employment Interviews
and performance ratings: ln general, the more
similar job applicants are to those who interview
them, the more likely they are to be hired.
Correspondingly, the more similar employ-
ees are to their managers, the higher the
ratings they receive from them.
17
You can
probably guess why similarity is so appeal-
ing: When people are alike on various
dimensions, they are more comfortable in
each other's presence, feel that they know
each other better, and are more confident
that they will be able to predict each others'
future reactions and behavior. ln short, every-
thing else being equal, we tend to associate
with, choose as friends or cofounders, and
even marry people who are similar to ourselves
in many respects.
Entrepreneurs are definitely no exception
to this similarity-leads-to-liking rufe. ln fact,
most tend to select people whosc back-
ground, training, and experience are highly
similar to their own. This is far from surprising:
people from similar backgrounds "speak the
same language"-they can converse more
readily and smoothly than individuals from
distinctly different backgrounds; and often,
they already know one another because they
have attended the same schools or worked
for the same companies. The Overall result is
that many new ventures are started by teams
of entrepreneurs from the same fields or occu-
pations: Engineers tend to work with engineers;
entrepreneurs with a marketing or sales back-
gmund tend to work with others from these fields;
scientists tend to work with other scientists, and
so on (see Figure 5.4).
ln one sense, this tendency is an important
"plus": As we'll notein a later section, effective
communication is a key ingredient in good
working relations. So the fact that "birds of a
feather tend to flock together" in starting new
ventures offers obvious advantages. Further,
recent findings
16
indicate that in new ventures-
and especially ones that are truly doing some-
thing new and innovative-similarity between
team members can contribute to successful
performance.
On the debit side of the ledger, however,
the tendency for entrepreneurs to choose
Figure 5.4
Similarity in Founding Teams of Entrepreneurs
Because people find it more pleasant and comfortable
to work with others who are simi/ar to themse/ves,
teams of entrepreneurs often consist of individuals
with similar background, training, and experience.
This can be detrimental to the success of the new
ventures they found.
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C HA f' TE R 5 Assembling the Team: Acquiririg and Utilizing Essential Human Capital 141
cofounders whose background and training are
highly similar to their own has several serious
drawbacks. The most important of these cen-
tersaraund redundancy: themore similar
people are, the greater the degree to which their
knowledge, training, skills, and aptitudes overlap.
For instance, consider a group of engineers who
start a company to develop a new product. All
have technical expertise, and this is extremely
useful in terms of designing a product that
actually works. But because they are all engi-
neers, they have little knowledge about market-
ing, legal matters, or regulations concerning
. employees' health and safety. Further, they may
know little about writing an effective business
plan which, as we'll see in Chapter 7, is offen
crucial for obtaining essential financial resources
and determining how to operate a company
effectively. Moreover, although all of them have
excellent quantitative skills, they are not proficient
at preparing written documents or in "selling"
their ideas; as is offen the case with individuals
from a or scientific background, they
are better with numbers than words. Further,
because all were trained in the same field (and
may even have studied at the same school), they
have overlapping social networks: They tend to
know the same people, and hence have a limited
range of contacts from whom they can obtain
needed resources-information, financial sup-
port, and so on.
ln contrast, recall Myomatrix, the biotech
start-up described in the opening to this chap-
ter. The cofounders came from different fields-
a branch of engineering and medicine. Also,
they had different career experience: One had
run a medical practice while the other had an
MBA and considerable business experience. So
afthough they shared an interest in biotechn.ol-
ogy, they came to it from different directions and
with different skills and knowfedge. The resuft
was a strong founding tearn that contributed in
many important ways to the new veriture's
success.
By now the main point shoufd be clear:
What any team of entrepreneurs needs fr
success is a wide range of inforrnation, skilis,
aptitudes, and abilities. And this variety is less
fikely to be present when all members of the
foundihg team are highly similar to one another in
important ways. ldeally, what one team member
Iacks one or more others can provide so that, as
the quotation affered at the start of this chapter
suggests, the whole is indeed greater than the
sum of its parts because the team can pool its
knowledge and expertise. Rule number one for
entrepreneurs in assembling their founding
teams, then, is the following:
Don 't yield to the temptation to work
solely with people whose background,
training, and experience are highly sim-
ilar to your own. Doing so will be easy
and pleasant in many ways, but it may
faif to provide the rich array of human
resources the new venture needs. Over-
all, it may often be better to choose
cofounders on the basis of complemen-
tarity-people who can provide what you
don't have, and vice versa.
142 f' '' f , ,. Assembling the Resources
learning 3
objective .
Describe a new venture's
board of directors and explain
how this board can a.ssist the
founding team. Describe other
sources of help and guidance
for the founding team; be sure
to include boards of.advisers,
employees, investors, consultants,
and government programs.
Beyond the Faunding Team:
Board of Directors, Key Employees,
Advisers
The founding team plays a crucial role in the launch of any new venture-how
could it be otherwise? But although it is important, the founding team is not
the entire story. Almost all new \'entures-and especially successful ones-
"import" \'aluable human resources that supplement those provided by the
founding team. Although these resources come from many different sources,
three of the most important are the board of directors, key employees, and
advisors and consultants. Savvy entrepreneurs draw on these added sources
of knowledge, expertise, and skills and use them to boost their companies into
the fast-growth pattern they seek.
13tJa'zd tJif
Any new venture that begins as a corporation (see Chapter 8 for a discussion
of the legal forms new companies can take) is required by law in many
countries to choose a board of directors-a group of individuals who are
elected by the shareholders in the corporation and have the task of overseeing
the management of the company. Although the duties of such boards vary
(e.g., they appoint officers of the corporation, declare dividends, provide
financial oversight), their main contribution, from the point of entrepreneurs,
is to provide advice and guidance. Wise entrepreneurs choose as board
members individuals who are knowledgeable and experienced in areas
relevant to thenew venture's operations. For instance, returning once again to
Myomatrix, the start-up biotech company, the founders chose for their board
of directors individuals \ovith a rich store of experience in the biotech field-for
instance, the CEO of a much !arger company. Other members of the board
held important positions in local banks or sei1ior positions in nearby
universities. The result? The board of directors could-and did-provide the
founding team with important advice and guidance, input that helped them
make their new venture a success.
In addition, because these well-respected individuals agreed to serve on
the board, Myomatrix gained something eise, too: lt gained reputation and a
sense of legitimacy. After all, why would such prominent people agree tobe
on the board of directors of a small unknown company unless they feit that it
had a promising future? Venture capitalists and other potential investors
certainly reached this conclusion, and the presence of these individuals on
Myomatrix's board helped it to gain the attention of the company that
ultimately purchased the young start-up.
Clearly, then, choosing an excellent board of directors is an important way
for new ventures to leverage their human capital-to add to the skills and
knowledge provided by the founding team in \vays that increase the chances
of success.

New ventures face serious obstacles \Vith respect to attracting outstanding
employees. As new companies, they are relatively unknown to potential
employees and cannot offer the legitimacy or security of established fim1s. Thus,
they enter the market for human resources with important disadvantages. Hmv
do start-up companies overcome these difficulties? Largely through the use of
social networks. In other words, they tend to hire people they know either
directly, from personal contact, or indirectly, through recommendations from
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(HA PT ER S Assembling the Team: Acquiring and Utilizing Essential Human Capital 143.
people they do know and trust
19
(see Figure 5.5). This makes a Iot
of sense because unlike larger, established companies, start-up
ventures cannot readily train employees themselves; as a result,
they must obtain them from outside the new firm, and this they
usually accomplish by using their existing networks.Z
0
By hiring people they knw (often, family members, friends,
or individuals with whom they went to school or worked in the
past), entrepreneurs are able to acquire human resources quickly,
without the necessity for lang and costly searches. Second,
because they know the people they hire either directly or
indirectly, entrepreneurs can more easily convince these individ-
uals of the value of the opportunity they are pursuing. Third, new
ventures often lack clearly established rules or a well-defined
culture; having direct or indirect ties with new employees
simplifies the task of integrating them into this somewhat loose
and changing structure.
One important reason for hiring people entrepreneurs
already know, directly or indirectly, is that serious errors in
hiring can be devastating for new ventures. Start-up companies
generally have limited resources, and making a bad decision
wastes these limited assets. Moreover, firing employees who
don't work out is always difficult and raises complex legal issues.
This aspect is certainly one reason why entrepreneurs often prefer
to use their social networks for hires, at least initially.
One exception to this general rule occurs when new ventures grow !arge
enough to require highly experienced management, such as an experienced
CEO or CFO. Recruiting such people is difficult even for !arge companies, and
small ones face an even tougher task in this respect. For this reason, some
entrepreneurs turn to executive search firms that specialize in identifying and
recruiting top-level people. This approach is generally expensive, so it rarely
occurs until start-ups are no Ionger struggling to survive; rather, search firms
are more typically employed after the new venture has become profitable and
when it is growing rapidly.
How should entrepreneurs go about the tasks of recruiting, motivating,
and ultimately retaining excellent employees? We'll cover these topics in
Chapter 12, so here we merely call your attention to the importance of these
tasks that must be carried out successfully if a new venture is to flourish. We
should also mention, however, that a highly skilled workforce is especially
important to new ventures operating in highly dynamic (i.e., rapidly
changing) environments. In contrast, companies operating in more stable
environments or industries can benefit greatly from helping their ernployees
arquire the skills and knowledge they need. In other words, the human
resources practices new ventures adopt should-and often do-reflect thc
kind of industries in which they operateY
Two other issues relating to hiring employees are important and worthy of
mention: Is bigger always better? In other words, is a growing workforce
always a good sign that a new venture is succeeding? And should new
ventures hire temporary or permanent employees? We'll now consider both of
these questions briefly.
ls Bigger Always Better? Number of Employees As a Factor
in New Venture Growth
New ventures face many difficult questions as they grow and develop,
but among these, orte of the most complex concerns the number of ernployees
they should hire. Adding employees-expanding the new venture's human
resources-offers obvious advantages. New employees are a source of
information, skills, and energy; further, the more employees a new venture
Figure 5.5
Social Networks: A Major Source
of New Employees for New
Ventures
Entrepreneurs often rely on social
networks as a source of new
employees. The individua/s they
hire are anes they know or ones
recommended to them by people
they trust.
learning 4
objective
Explain why a growing
number of employees is
not necessarily a sign
that a new venture is
successful.
.,
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0
;;;
>
144 PA R T 2 Assembling the Resources
has, the greater the number and !arger the size of the projects it can undertake.
As we noted earlier, there is little doubt that in many contexts, people working
tagether in a coordinated manner can accomplish far more than individuals
working alone. But adding employees to a new venture has an obvious
downside, too. Employees add to the new venture' s fixed expenses and raise
many complex issues relating to the health and safety of such individuals-
issues that must be carefully considered. In a sense, therefore, expanding t h ~
company' s workforce is a two-edged sword and the results of expanding the
nurnber of employees can truly be rnixed in nature.
Overall, however, existing evidence suggests that on balance, the benefits
of increasing the nurnber of employees outweigh the costs. New ventures that
_ start with more employees have a greater chance of surviving than ones that
begin with a smaller number.
22
Similarly, companies with more employees
have higher rates of growth.than ones with fewer employees.
23
Profitability,
too, is positively related to the size of new ventures. For example, the greater
the nurnber of employees, the !arger the earnings of new ventures, and the
greater the income generated by them for their founders.
24
We should quickly note that these findings are all correlational in nature:
They indicate that number of employees is related in a positive rnanner to
several measures of new ventures' success. They do not, however, indicate
that hiring new employees causes such success. In fact, both nurnber of
employees and various measures of financial success may stern from other,
underlying factors, such as the quality of the opportunity being developed,
commitrnent and talent of the founding team, and even general economic
conditions (it is often easier to hire good employees at reasonable cost when
the economy is weak than when it is strong). So the relationship between new
venture size (number of employees) and new venture success should be
approached with a degree- of caution. Still, it seerns clear that to the extent
human resources are a key ingredient in the success of start-up cornpanies, the
!arger their workforce, the greater their success is likely to be.
Temporary or Permanent Employees? Commitment Versus Cost
Achieving an appropriate balance between costs and numbers of new
employees is not the only issue facing new ventures where expanding their
workforces is concerned. In addition, they must determine whether new
employees should be hired on a temporary or permanent basis. Again, both
strategies offer advantages and disadvantages. Temporary employees reduce
fixed costs and provide for a great deal of flexibility; they can be hired and
released as the fortunes of the venture dictate. Further, hiring temporary
employees perrnits the new venture to secure specialized knowledge or skills
that may be required for a spedfic project. When the project is completed, the
temporary employees depart, thus reducing costs.
On the other hand, there are several ciisadvantages associated with
ternporary employees. First, they may Iack the commitrnent and motivation of
permanent employees. After all, they know that they have been hired on a
contract basis for a specified period of time (although this contract can often be
extended), so they have little feeling of commitrnent to the new venture: In a
sense, they are visitors, not permanent residents. Companies also face the real
risk that temporary employees will acquire valuable knowledge about the
company or its opportunity and then carry this information to potential
competitors. Permanent employees, in contrast, tend to be more strongly
- committed and motivated with respect to the new venture, and are less likely
to leave-especially if they gain an equity stake in the company. _
Overall, then, the choice between temporary and permanent employees is
a difficult one. Which is preferable seems to depend, to a !arge extent, on
specific conditions faced by a new venture, such as the industry in which it
operates or the opportunity it is attempting to exploit. In situations where
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C HA P' T F.. R 5 Assembling the Team: Acquiring and Utilizing Essential Human Capital 145
flexibility and speed of acquiring new sets of knowl-
edge and expertise are crucial (e.g., arnong software
start-up companies), temporary employees may be
beneficial.
25
In situations where employee commit-
ment and retention are more important (e.g., employ-
ees rapidly acquire skills and knowledge that increase
their value to the new venture), then focusing on a
permanent workforce may be preferable.
26
tJj acmiJ&v>-
Corporations are required to have boards of directors,
but no company is required to have a board of
advisers-a group of experts who are invited by a
company's managers to provide advice and input on a
regular basis (see Figure 5.6). Although not a legal
requirement, appointing a board of advisers is increas-
ingly popular among entrepreneurs. Why? Because doing so allows the new
venture and its founding tearn to draw upon the expertise and knowledge of
experienced individuals. Additionally, many experienced and prominent
people are more willing to serve in this relatively informal role than in the
more formal one specified by being on a board of directors.
Entrepreneurs interact with boards of advisers in different ways, but
typically, they rneet with thern several times a year to seek their advice and
guidance. Face-to-face rneetings are not always necessary; teleconferencing or
Internet connections can sometimes be sufficient. However they contact their
ad visers, the basic principle for entrepreneurs rernains the same: Choose
people for this role who can really help. In other words, select ones who have
experience in the industry or rnarket where the new venture operates, who
have specific skills the founding team Iacks, and who are well-respected in
their various cornmunities. How can new ventures attract the help of such
individuals? Generally, not by paying them in cash; the financial resources of
new ventures are usually too limited for this, and potential advisory board
rnernbers would often be very expensive if they were recruited in this manner.
Instead, such people agree to serve as advisers because they have intrinsic
interest in the business of the new cornpany, andin return for alternate forms
of compensation, such as shares in the new venture. However they are
recruited, their help can be invaluable and wise entrepreneurswill generally
seek it out.
atzet
In addition to help from a board of directors and a board of advisers,
entrepreneurs can also often benefit from input provided by several other
sources. First, of course, investors have a real stake in the start-up ventures
they finance: They want thern to succeed and are often willing to provide
advice, assist in hiring key ernployees, and assist entrepreneurs in rnaking
key business contacts. This is hardly surprising; After putting their money
fnto a new venture, investors often rnonitor it closely and require detailed
reports from the entrepreneurs. This often Ieads thern to recognize when
things are not going well, and to intervene in various ways to irnprove the
situation.
In addition, entrepreneurs can sornetirnes obtain help from consultants,
experts in various fields or areas whorn they hire for specific fees. For
instance, rather than hire their own accountants, entrepreneurs often prefer
to hire such help as needed. Similarly, they hire specia1ists in production or
engineering to help solve problerns relating to these areas. The same may
Figure 5.6
Boards of Advisers: Help from
the Experts
A growing number of new ventures
are appointing boards of advisers-
groups of peop/e with skil/s, knowl-
edge, and experience relevant to
the company's business. New ven-
tures are not /egally required to
appoint such boards, but many
entrepreneurs recognize their value
and are estab/ishing them in order
to benefit from the help these
boards can provide.
146
&,qrd of b l ~ o r s .
Board of:-A(kjsers
Einployt$
C6nsvltanfs
Investors
GOvetnment--
Programs
Figure 5.7
Assembling the Resources
even be true for marketing, at least initially. Consultants
aren't inexpensive, but if their services ultimately help a
new venture avoid making costly mistakes, it is capital
weil invested.
We should also note that consultants are some-
times provided through government programs and
agencies. For instance, SCORE, one such agency, has
volunteers-typically retired entrepreneurs or execu-
tives-who enjoy helping nev.r companies. Their
services are generally free, and they can be especially
helpful to entrepreneurs when hiring specialized
employees v.rould not be feasible.
In sum, as shown in Figure 5.7, entrepreneurs are
definitely not alone: They can obtain help from -a
number of sources, if they are wise enough to seek it.
Help ls Out There lf You Ask
for lt
No one-not even the most talented and experienced founding team-has all
the knowledge and skills needed to run a successful and rapidly growing new
venture. So clearly, entrepreneurs should seek help and put it to use in
developing the opportunities they have chosen to pursue. (Choosing
cofounders whose background and experience is heterogeneaus offers many
advantages, but it involves certain risks, too. Piease see the Danger! Fitfall
Ahead! section below for an explanation.)
Entrepreneurs can obtain he/p in
running their new ventures from
many different sources. Some of
the most important ones are
summarized here.
The Risks of Choosing Cofounders
You Don't Know-And How to
Reduce Them
Earlier, we recommended that in building their
founding teams, entrepreneurs should try to
avoid "cloning" themselves-working with
people who have the same mix of knowledge,
skills, training, and characteristics as they do.
The main reason for this recommendation is
clear: The founding team provides the basic
store of human capital on which the new
venture can draw, so the broader and more
diverse this supply of valuable resources, the
better. But there is another side to this issue,
one we don't want to overlook. This has to do
with the problems involved in working with
other people we don't know weil. Since we
don't have past experience with them, we have
to guess about what they actually bring to the
table. Do they have the skills and knowledge
they claim to have? Have they had the expe-
rience they describe to us? And what are they
like as individuals-is our first impression of
them accurate along key dimensions such as
their Ievel of conscientiousness (reliability,
dependability), extraversion (are they really
outgoing and friendly-or not?), and so on.
Obviously, it's important for entrepreneurs to
make accurate judgments in these respects,
because once the new venture is launched, it
is often very difficult to dissolve the business
relationships that have been formed without
damaging the company itself. So, a key ques-
tion arises: How can we assess other people
accurately? This topic has received decades of
attention in other fields (e.g., psychology), and
much has been learned about how it proceeds
and about how we can be more accurate at it.
Here, we'll simply offer a few generat pointers
!hat can help entrepreneurs make the correct
decisions.
1. Always check credentials-especially
crucial ones: lt doesn't mean that when
considering someone as a potential part-
ner you should hire a private investigator-
far from it. Rather, it simply means that a
few well-placed phone calls can readily
confirm information a potential partner is
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CHAPTER 5
Assembling the Team: Acquiring and Utilizing Essential Human Capital 147
: .. -- .
. /
.. ,
__ .-
tion,- or dapartures -fromtruthfulncnn,
.. through to nonverbal cues-
expressions, body or
. rionverbai as-
pects'(?fspee.ch {hotrelated to the
-__ . '6hne Wtirds theyspeak..::for
... -- the tne of people
- - ; shbw -
. . '' .-
.. verbal for instancei fadal
are one chanhel, body. moveO,enti -
another.). These are be
qil:sic
.lm=<:l<>.rl'!<:l
. : . .
ofteri frequeritly revealed by certain
of eye .cnfact. People \fo/h are lying. often -.
blink ften and -show pupils that
mre dil?ted thari someone. who is telfing
. trth:: They rrtay also an unusually
_low leyel of eye contact or-surprisingly-.--an
\1nuiualiy high one, as they aftempt fo fake
being:honest by looking others right ir:r
-tt\eeye.
(contiriued)
148 PART l Assembling the Resources
... : _ ...
..:
-7-
. ..:.'
. ;,.:- ',.. ,.:-... . : ."' .
. .. :.
Figure 5.8 Recognizing Deception
By paying careful attention to the cues summarized here, it is
often possib/e to tel/ when others are not being entirely
truthful with us.
.---.. .. .. :<::. , .. -
'. _... :.-.-->:.: __. :--;'_:_. ....
Utilizing the New Venture's
Human Resaurces: Building Strang
Warking Relatianships Amang
the Faunding Team
Assembling the resources needed to perform a task is an essential first step;
indeed, there is no sense in starting unless the required resources are available
or easily obtained as the need arises. But gathering resources is only the
beginning; the task itself rnust then be performed. The same principle holds
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C HA PT ER 5 Assembling the Team: Acquiring and Utilizing Essential Human Capital 149
true for new ventures: Assembling the necessary human capital-an
appropriate pool of knowledge, experience, skills, and abilities-is only
the beginning. The people who constitute the founding team must then
work tagether in an effective manner if the new venture is to succeed.
Unfortunately, this key point is often overlooked or given insufficient
attention by entrepreneurs. They are so focused on the opportunity they
identified and hope to develop that they pay scant attention to building
strong working relationships with one another-working relationships that
help the new venture to utilize its human capital to the fullest. Growing
evidence suggests that such relationships are an essential ingredient in new
ventures' success.
27
For instance, in one recent study of 70 new ventures,
higher Ievels of cohesion among thefounding team (positive feelings toward
one another) were stron&ly associated with superior financial performance
by these new ventures.Z In view of such evidence, a key question arises:
How can strong working relationships between founding team members be
encouraged? Although this question has no simple answer, three factors
appear to play a crucial role: a clear initial assignment of roles (responsibilities
and authority) for all founders and other team members; careful attention
to the basic issue of perceived fairness; and developing effective patterns
and styles of communication (especially with resped to feedback) among
team members.
A major source of conflict in many organizations is uncertainty concerning two
issues: responsibility and jurisdiction. Disagreements-sometimes harsh and
angry ones---often develop over the question of who is supposed to be
accountable for what (responsibility), and over the question of who has the
authority to make decisions and choose among alternative courses of action
(jurisdictlon).Z
9
One effective way of avoiding such problems is through a clear
definition of roles-the set of behaviors or actions that individuals occupying
specific positions within a group are expected to perform, and the authority or
jurisdiction they will wield. Once established, clear roles can be very useful.
For instance, consider once again the successful biotech company we
described earlier-Myomatrix. (We continue to refer to this company because
it illustrates so many principles we believe to be important.) The cofounders
had an almost perfect mix of skills and experience---one was an M.D. and the
other held a Ph.D. and an MBA. Seeking to build on this key advantage, they
negotiated clear and distinct roles for each to play. The physician ran the
laboratory and set the direction for many of the company's research projects;
after all, he had detailed knowledge of the diseases for which Myomatrix was
seeking new drugs and treatments. The other founder, in contrast, handled
many of the business-related aspects of the company-everything from
maintaining required records through seenring new capital. Both contributed
to the scientific and research activities of Myomatrix. Because these roles
were discussed arid arranged even before the company was launched, the
cofounders could truly work in a complementary manner, with each providing
valuable contributions for the company. This, we suggest, was one ingredient
in Myomatrix's success.
The lesson is clear: Once the founding team has come tagether to form the
new venture, its members should. divide key responsibilities and authority
between them in accordance with each founder' s expertise and knowledge.
Anything eise may weil prove costly and detract from the new venture's
success. This sounds very simple, but the factisthat many entrepreneurs are
highly energetic, capable people, used to "running the show'' in their own
lives. Unless they can learn to coordinate with their cofounders, though, they
may run the risk of seriously weakening their own companies.
learning 5
objective
Explain why it is useful
for 6ofounders to have
clearly defined roles in
their new venture.
150 ? ART 2. Assembling the Resources
learning
objective
6
Define the self-se_rving bias and
explain how it plays an impor-
tant role in perceived fairness.
A Note on Role Conflict
AB we just stated, it is important for entrepreneurs to establish clear-cut roles
for all cofounders in order to facilitate coordination between them and to
maximize the value of the new venture's human capital. But entrepreneurs,
like everyone eise, have roles outside their companies as well as within them.
For instance, they may be spouses, significant others, or parents; and they are
certainly sons and daughters to their own parent:S. A dassie finding in the field
of human resource management is that the roles all of us hold sometimes make
incompatible demands upon us. In other words, we experience role conflict-
contrasting expectations about behavior and responsibilities held by different
groups of individuals.
30
Spouses and significant others, for example, expect us to
be areund to fill their emotional needs at least some of the time; similarly, children
have legitimate expectations for their parents. So dealing with role conflict can be a
stressful task-and a difficult juggling act-for entrepreneurs who must devote so
much of their time to running their new ventures. Role conflict can be a serious
matter with important consequences; if the significant people in entrepreneurs'
lives cannot come to terms with the heavy demands on the entrepreneurs' time
and energies, serious interpersonal problems can result. These issues, in turn, can
add to entrepreneurs' stress and reduce their overall performance. Clearly, then,
getting one's spouse, significant others, children, and other family members "on
board" is a task no entrepreneur can afford to overlook.
P&tceived 'FaPzM5-5-: an ~ l u w e l3ut 85&liid
CtJtnpotWd
Try this simple exercise: Think back over your life and remernher a specific
occasion when you worked with others on some project. The context is
unimportant-it can be any kind of project you wish-but try to recall an
incident in which the outcome was positive and the project was a success.
Now, divide 100 points between yourself and your partners according to how
!arge a contribution each person made to the project. Next comes the key
question: How did you divide the points? If you are like most people, you
probably gave yourself more points than your partners. (For example, if you
had one partner, you took more than SO points; if you had three, you took
more than 33.3 points, and so on.)
Now, by way of contrast, try to recall another incident-one in which you
also worked with partners, but in which the outcome was negative and the
project failed. Once again divide 100 points between yourself and your partners
according to how large a contribution each person made to the project and its
outcome. In this case, you may weil have given others more points than yourself;
in other words, you held them, not yourself, responsible for the negative results.
If you showed this pattern, wekome to the dub: You are demonstrating a
powerful human tendency known as the self-serving bias. This is the tendency to
attribute successful outcomes largely to internal causes (our own efforts, talents,
or abilities) but unsuccessful ones Iargely to external causes (e.g., the failings or
negligence of others, factors beyend our control).
31
This bias has been found to
be a strong one, with serious implications for any situation in which people
work together to achieve important goals. Specifically, it often Ieads all those
involved to conclu.de that somehow they have not been treated fairly. Why?
Because each participant in the relationship tends to emphasize her or his own
contributions and minimize the contributions of others, so they conclude that
they are receiving less of the available rewards than is justified. Further,
because each person has the same perception, the result is often friction and
conflict between the individuals involved.
In other words, this tendency raises complex questions relating to
perceived fairness-a key issue for entrepreneurs. Because of the self-serving
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CHArTER 5 Assembling the Team: Acquiring and Utilizing Essential Human Capital 151
.:,:
Figure 5.9 The Self-Serving Bias and Perceived Unfaimess
Because most individuals have a strong tendency to perceive their contributions to any i:han they are, they also
tend to perceive that theyare receiving a smatler share of available rewards than is appropriate. tn oiher words, they conclude that they
are being treated unfair/y. This can be a serious problern for founding teams of entrepreneurs.
bias (plus other factors, too), we all have a tendency to assume that we are
receiving less than we deserve in alrnost any situatin. In other words, we
perceive that the balance between what we contribute and what we receive is ,
less favorable than it is for other persons. In specific terrns, we perceive that
the ratio between what we are receivin.g and what we are contributing is srnaller
than that for others. In general, we prefer that this ratio follow the general
principle of distributive justice (also known as equity), which suggests that the
larger any person's contributions, the larger her or his rewards. Most people
accept this principle as valid, but the self-serving bias Ieads us to cognitively
inflate our own contributions-and hence to conclude that in fact, we are not
being treated fairly (see Figure 5.9).
What do people do when they perceive that the distribution of rewards is
unfair? Generally, they react in a variety of ways, none of which are benefidal to a
new venture. The rnost obvious tactlc is to dernand a larger share; but if others do
not view these demands as legitirnate, conflict is the likely outcorne. Another
approach is to reduce one's contributions-to reduce effort or shirk responsibility.
This, too, can be very harmful to the success of a new venture. An even rnore
darnaging reaction is to withdraw-either physically or psychologically. Dis-
aifeeted cofounders sometirnes pull out of new ventures, taking their experience,
knowledge, and skills with them. If they are essential mernbers of the team, their
departure can mark the beginning of the end for the ventures in question.
All these possibilities are bad enough, but even worse is the fact that
people tend to focus relatively little attention on the issue of fairness when
things are going weil (e.g., they are getting along weil with their cofounders),
but they devote increasing attention to this issue when things begin to go
badly.
32
In short, when a new venture is succeeding and reaching its goals,
members of the founding team rnay show little concem over distributive justice.
If things go badly, however, they begin to focus increasing attention on this
issue-thus intensifying this source of interpersonal friction.
Given the existence of this cycle, it is truly crucial for the founding teams
of new ventures to consider the issue of perceived faimess very carefully. This
iinplies that they should discuss this issue regularly to assure that as roles,
responsibilities, and contributions to the new venture change (which they will
inevitably do over time), adjustments are made with respect to equity, status,
and other rewards in order to reflect these changes. This is a difficult task since
all members will tend to accentuate their own contributions (recall the powerful
self-serving bias). But since the alternative is the very real risk of tension and
conflict between the fotmding tearn rnernbers, and since conflict is often a major
waste of time and

it is certainly a task worth performing well-and one
that will help the new venture utilize its human resotirces to the fullest.
152 PART 2
Dilbert
Assembling the Resources
NOTICE THAT I
TOOK YOUR t-\ONEY
AND I'M GivtNG
YOU Alt-\OST
NOTHING IN
RETURN.
1ii
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Source: United Feature Syndicate, December 29, 1999.
Figure 5.10 Fairness: An lmportant lssue for Entrepreneurs, Investors and Everyone Else
Do you think this exchange is fair? Probably not! Although Dogbert provides the executives shown here with something
(e.g., experience in being cheated), few people would view this situation as fair. in fact, perceived fairness is a key issue in virtua/ly
a/1 working relationships, including those between cofounders of new ventures, founders and employees, and the new venture
and its customers.
One more point: Issues of faimess arise not only between cofounders, but
also between investors and entrepreneurs, between founders of a new venture
and their employees, and in fact, in all working relationships. For instance,
take a look at the situation shown in Figure 5.10. In it, one character seems to
be taking unfair advantage of another, which, as you probably know from
your own experience, can set the stage for major problems.
Issues of fairness also arise when companies form business alliances.
As we'll note in Chapter 10, such alliances can often be extremely helpful
to new ventures, but in order to survive, they must be perceived as fair
and mutually beneficial by both sides. Here's one example of a successful
alliance. 8minuteDating is a cornpany with an idea that has taken the
matchmaking industry by storm. At 8minuteDating events, single men and
warnen gather at a restaurant, chat in couples for eight minutes, and then
move on to the next table, where they meet another person (see Figure 5.11).
Figure 5.11 Fairness: A Key Principle in Business Alliances
Business alliances can be highly beneficial to entrepreneurs, but in order to succeed, both sides must perceive them as fair and as yielding
real benefits. This is definitely the case for the alliance between BminuteDating and TP/, lnc. BminuteDating encourages people
pqrticipating in its dating events to check out the personal columns, and TPI promotes BminuteDating in the personal columns it
runs for 550
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C HA PT ER. 5 Assembling the Team: Acquiring and Utilizing Essential Human Capital 153
This format allows each person participating in the event to meet many
potential partners in one evening instead of just one, as is true in traditional
dating. After the event is over, couples who have expressed liking for each
other can meet again. Recently, 8minuteDating formed an alliance with Tele-
Publishing International (TPI)-a company that runs the personalad pages
for 550 newspapers in the United States. How did this alliance come about?
The faunder of 8minuteDating, Tom Jafee, learned that Adam Segal, an
executive with TPI, was having dinner with his mother at a restaurant where
an 8minuteDating event was being held. Jafee introduced hirnself and the
two entrepreneurs quickly realized that they could form a mutually
beneficial alliance: TPI would advertise 8minuteDating in its personal
columns, and 8minuteDating events would distribute free coupans and
sponsor other promotions to encourage its customers to try the personal ads.
The alliance worked like a charm, and both companies benefited consider-
ably. Both see it as fair, and as helping them to attain their major goals. As
Segal puts it, "The beauty of our alliance is that it can expand with
8minuteDating's growth. Every time they start events in a new city, TPI will
already be there with our personal ads in the newspapers. Talk about a
match made in heaven." So if you consider forming an alliance with another
company, please do devote careful attention to the question of fairness:
Alliances that are not perceived as meeting this essential criterion are
unlikely to survive.
~ t e c t i v e C()tnJnMiui.tMtt
Perceived unfairness is not the only cause of costly conflicts between members
oLa new venture' s founding team. Another major factor involves faulty styles
ofcommunication. Unfortunately, individuals often communicate with others
in a way that angers or annoys the recipients, even when it is not their
intention to do so. This situation arises in many different ways, but one of the
most common-and important-involves delivering feedback, especially
negative feedback, in an inappropriate manner. In essence, the only truly
rational reason for delivering negative feedback to another person is to help
this person improve. Yet, people often deliver negative feedback for other
reasons, such as to put the recipient in his or her "place," to cause this person
to lose face in front of others, to express anger and hostility, and so on. The
result of such negative feedback is that the recipient experiences anger or
humiliation, which can be the basis for smoldering resentrnent and Iang-
lasting grudges.
34
When negative feedback is delivered in an informal context,
rather than formally (e.g., as part of a written performance review), it is known
as criticism, and research findings suggest that such feedback can take two
distinct forms: constructive criticism, which is truly designed to help. the
recipient improve, and destructive criticism, which is perceived-rightly so-as
a form of hostility or attack.
What makes criticism constructive or destructive in nature? Key differ-
ences are outlined in Table 5.1. As you can see from this table, constructive
criticism is considerate of the recipient's feelings, does not contain threats, is
timely (occurs at an appropriate point in time), does not attribute blame to the
recipient, is spedfic in content, and offers concrete suggestions for improve-
ment. Destructive criticism, in cont;rast, is harsh, contains threats, is not timely,
blames the recipient for negative outcomes, is not specific in content, and offers
no concrete ideas for improvement. Table 5.1 also provides examples of each
type of criticism.
Research findings indicate that destructive criticism is truly destructive: It
generates strong negative reactions in recipients, and can initiate a vicious
cycle of anger, the desire for revenge, and subsequent conflict. In other words,
it tends to generate what is known as affective or emotional conflict-conflict
learning
objective
7
Explain the difference
between constructive
and destructive
criticism.
154 PART 2 Assembling the Resources
Tab(e 5.1 Constructive versus Destrcutive Criticism
As shown here, constructive criticism is negative feedback that can actuatly he(p the recipient improve. Destructive criticism, in contrast,
is far tess likety to produce such beneficiat effects.
Considerate-protects self-esteem
of recipients
Does not contain threats
limely-occurs as soon as possible
after the poor or inadequate
performance
Does not attribute poor
performance to intemaf causes
Specific-focuses on aspects of
performance that were inadequate
Focuses on performance,
not the recipient
Offers concrete suggestions
for improvement
lnconsiderate-harsh, sarcastic,
biting
Contains Ihreals
Not timely-occurs after an
inappropriate delay
Attributes poor performance
to intemal causes
General-a sweeping
condemnation of performance
Focuses on the recipient
Does not offer concrete
suggestions for improvement
Constructive: "I was disappointed in your performance."
Destructive: "What a rotten, lousy job!"
Constructive: "I !hink improvement is really important."
. Destructive: "lf you don't improve, you are history!"
Constructive: "You made several errors in today's report."
Destructive: "l've been meaning to tell about the errors
you made last year ... "
Constructive: "I know that a Iot of factors probably played a role
in your performance."
Destructive: "You failed because you just don't give a damn!"
Constructive: ''The main problern was that the project was Iaie."
Destructive: "You did a r ~ l l y tenibfe job."
Constructive: "Your performance was not what I expected."
Destructive: "You are a rotten performerl"
Constructive: "Here's how I think you can do better next
time areund . _ . "
Destructive: "You better work on doing better!"
that is based largely an negative emotions. Such conflict can be costly for any
working relationship and can truly disrupt relations between founding team
rnembers.
35
In contrast, another kind of conflict that is focused an rational
disagreernents over ideas or strategies-cognitive conflict-can actually be
beneficial, because it Ieads to careful discussion of points of disagreement.
Once again, the basic message for entrepreneurs is clear: Effective
comrnunication between cofounders is one essential ingredient in establish-
lng and maintaining effective working relationships. If it is lacking, serious
problerns may result. For instance, consider a new venture started by
partners who have divergent training and experience: one is an engineer and
the other has a background in marketing. Although the marketing cofounder
selected his partner carefully, he harbors negative feelings about engineers
(''They never think about people!"). As a result, he criticizes the engineer's
designs for new products very harshly. The engineer, offended by this
treatment, begins to make changes in the company's products without
informing the cofounder. Because the marketing entrepreneur doesn't know
about these changes, he can't get customer input before they are made. The
result? The cornpany's products "bomb" in the rnarketplace, and soon the new
venture is in deep trouble. This is just one example of how faulty comm'uni-
cation between mernbers of the founding tearn can produce disastraus effects.
The rnain point should be clear: Strang efforts to attain good, constructive
communication bctwccn co-fow1ders are very worthwhile.
One final point: Is all conflict between founding co-founders bad?
Absolutely not. Conflict between tearn rnernbers can, if it is focused on
specific issues rather than personalities, and is held within rational bounds, be
very useful. Such "rational" conflict can help to focus attention an important
issues, rnotivate both sides to understand each others' view more clearly, and
can, by encouraging both sides to carefully consider all assurnptions, lead to
better decisions.
36
In surn, conflict between founding team mernbers is not
necessariiy a bad thing. Rather, it-like all other aspects of the new venture's
opetations-should be carefully rnanaged so that benefits are rnaximized and
costs minimized. Overall, strong and effective working relationships between
founding mernbers are a powerful asset to any new venture, so efforts to foster
thern should be high an every founding team' s "Must Da" list.
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204
tJ6 j-eclitJe5
c::ittn 'Madiny thi; c.hapte,, jMU ;l1t>uld 6e a61e tt>:
1 Describe the basic nature of a business plan and
explain why entrepreneurs should write one.
2 Explain how the process of persuasion plays a key
role in business plans and in the success of new
ventures.
3 Explain why the executive summary is an important
part of any business plan.
4 Describe the major sections of a business plan and
the type of information they should include.
5 Describe the "seven deadly sins" of business plans-
errors all entrepreneurs should avoid.
6 Explain how venture capitalists actually make their
decisions about whether to provide financial support
to new ventures.
7 Explain why the quality of a new venture's businessplan
is not always a good predictor of the new venture's
future success.
8 Describe the steps entrepreneurs should take to
make their verbal prcscntations to potential investors
truly excellent.
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C HA PT ER 7 Writing an Effective Business Plan: Building a Roadmap to Success 205
There is a real magic in enthusiasm. lt spells the difference between
mediocrity and accomplishment.
Whether they realize it or not, most entrepreneurs accept
these words as true. They are convinced that because
they believe passionately in their ideas and their new
ventures, others will too. As a result, they are often
dismayed when their initial efforts to obtain financial
backing meet with lukewarm receptions {or worse!) from
venture capitalists, business angels, and others who can,
if they wish, provide the resources the entrepreneurs
need. "What's wrang with these people?" they wonder.
"Can't they recognize a great thing when they see it?"
The problem, of course, may not be a Iack of good
judgment on the part of potential investors. Rather, it may
have much more to do with the kind of job the
entrepreneur is doing in presenting her or his idea to
others. Yes, the entrepreneur is enthusiastic, and enthu-
siasm does indeed sell. But in order to induce other
people-especially ones who have been taught by years
of experience to view new ventures with caution,
enthusiasm alone is not enough. ln addition, entrepre-
neurs who want to succeed must realize that they face a
serious and tough task, one centered araund the process
of persuasion-the task of inducing others to share our
views and to see the world much as we do. After all, why
should total strangers hand over their hard-earned money
to something as risky in nature as a new venture,
-Norman Vincent Peale (1961)
especially if it is going to be run by someone who .has
had little if any experience in starfing . or running a
. . . . .
business? Would you? We_ doubt iU:
lf enthusiasm alone is nokenogh, can ,
entrepreneurs do to gain the they For
many entrepreneurs, a Jarge pB.rt of the .
preparing a truly first-rate . b.Lisiness plan. This
written expression of the entrepreneur's vlsionfor
converting opportunities into profrtable,
is, in most cases, the entry card for
by venture capitalists, banks, and other sources of
funding: Most won't even think about supporting a new
venture until they have seen, and carefully evaluated, this
document. This basic fact poses something of a dilemma
for many entrepreneurs: They firmly believe in their ideas
and their own ability to carry them through to success,
but at the same time, they have had little practice in
writing formal documents such as business plans. ln fact,
unless they have a background in business {which is true
of only some entrepreneurs), they may not even have a
clear idea about what a business plan is or what it should
contain. The result? Many do not prepare such plans; in
fact statistics show that more than 60 percent of small,
new companies have no business plan-or no written
plans of any kind, for that matter.
1
And that brings us to the main purpose of this chapter: helping you
understand what a business plan is and how to write a good one-one that
will assist you in attaining the support you need, financial and otherwise. In
order to reach this gual, we'll pruceeu as fulluws. First, we'll examine the
question of why you should write a business plan, even if you are in the rare
and truly glorious position of not needing financial support to get started. As
wc'll soon note, preparing this document can be helpful in several important
ways. It can help entrepreneurs develop better plans for converting their
ideas and vision into reality-a viable, profitable company. And it can
certainly play a role in obtaining financial support. Whether having a strong
business plan is a good predictor of ultimate success, however, is a more
complex question, which we'll examine carefully in a Qualifying Common
Sense section later in this chapter?
Putting this important issue aside for the moment, we'll turn next to the task
of describing business plans in detail-the key sections they should contain,
how they should be put together, and so on. Throughout this discussion, we'll
do more than just describe the basic requirements; we'll also provide you with
suggestions for making your plan excellent-an instrument for transmitting
206 PART 2 Assembling the Resources
Figure 7.1
Business Plans: How VCs
Evaluate Them
Business p/ans-or at least good
find their way to the
desks of venture capitafists who
evafuate them from the point of
view of making-or not making-an
investment in the new ventures
described in these p/ans. How do
VCs actuafly evafuate business
plans and reach these decisions?
Even though it would be comforting
to conc/ude that the process is
entirefy rational, research findings
indiCate that often it is not.
learning
objective
1
Oescribe the basic nature of a
business plan and explain why
entrepreneurs should write one.
your own enthusiasm and vision clearly to others. We think this is crucial
information that will serve you weil as you move toward starting your own
venture.
After describing the major sections of a formal business plan, we'll turn
to another key question: How do VCs and other potential investors actually
evaluate them? In other words, how do these individuals, so crucial to the
future of almost any new venture, decide whether to provide the financial
resources sought by entrepreneurs (see Figure 7.1)? The answer, as we'll
soon see, contains some surprises. But in fact, you should not be surprised by
what research on this topic has found because, as we've seen in earlier
chapters, human thought-including decision making by experts-is rarely
entirely rational. .
a:
Finally, we'll return to a key theme we wish to emphasize throughout this
E chapter: Persuasion is, indeed, the name of the game where starting a new
..
. venture is concerned. For that reason, writing an excellent business plan,
g while certainly a crucial activity, is only the first step in a !arger process.
l
o Persuading other people to support your new venture involves several other
steps as weil. For instance, if your plan is one that generates initial positive
reactions on the part of venture capitalists and other investors to whom you
send it (an outcome achieved by only a few percent of all plans) this may Iead
to the next step: an invitation for you to visit and make a formal presentation.
This presentation often plays an important role in decisions about whether to
support your venture, and to what extent, so it is a task you should definitely
take very seriously. How can you "shine" in this context? We'll provide
concrete suggestions for reaching these goals based both on careful research
and our personal experiences as entrepreneurs.
Why Write a Business Plan?
Make no mistake: preparing a businessplan involves a Iot of hard work. In
fact, it usuaily requires many hours of careful thought, foilowed by an equal
or !arger number of hours spent converting these thoughts into a written
document. Although university professors may enjoy such activities,
entrepreneurs generaily do not. Often, they are eager to get started-to
launch their business and make their vision happen. And many realize that
once their new venture has been launched, it will rarely follow the steps and
timeline outlined in the business plan. So why should they devote so much
hard work to the task of preparing a first-rate business plan? As we'll now see,
there are two basic reasons. One involves benefits entrepreneurs (the founding
team) can derive from writing such a plan, nncl the other involveti the valuc of
a good businessplan as a means of gaining resources, financial anrl otherwise.
We'll now consider both of these issues.
ttJ the katn: 7he 7/aiue
()j- CieaJv- Cut
Perhaps the simplest yet most important answer to the question, "Why write a
business plan?" is this: lt provides important benefits to the entrepreneurs
themselves. More specifically, a good businessplan is not simply a document
designed to "sell" investors on the entrepreneurs' ideas: It is also a detailed road
map for co!lverting a recognized opportunity into a profitable business. Writing a
business plan requires an entrepreneur to carefully and fully address a
number of complex issues relating to the process of creating an actual
company. A comprehensive business plan describes the opportunity (what
needs the new product or service will meet, what markets it will have), how
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C k A P ;!:: R 7 Writing an Effective Business Plan: Building a Roadmap to Success 207
the product or servicewill be produced or delivered, what skills and abilities
the founding team brings to the new venture, how the new company will be
structured, how the new venture will. gain a competitive advantage, what
critical risks it faces, what financial resources it needs, and so on.
In other words, the term plan in ''business plan" is really appropriate:
Writing a carefully prepared and well-reasoned business plan can indeed help
entrepreneurs with the process of planning-it really can provide the roadmap
to success mentioned in the title of this chapter. More to the point, a well-
prepared business plan will explain what the new venture is trying to
accomplish and how it will go about attaining these goals; in other words, it
describes the new venture's business model-how it will actually operate and
how it will, potentially, make a profit. Venture capitalists and others who might
support a new venture often seek this kind of inforrnation. In fact, the more
clearly a business plan explains precisely ho-w the goals sought by the new
venture will be reached, the more impressive (and persuasive) the plan will be.
But remember: Entrepreneurs do not write business plans solely to persuade
others to invest in their new venture. They also write them to provide
themselves with a clearer understanding of the best ways of proceeding. That
guiding outline, in turn, can contribute significantly to the u1tirnate success of
the new venture. In fact, recent findings indicate that carefu1 planning is a key in
the success of new ventures. For instance, at least up to a point, the more time
entrepreneurs spend engaging in guided preparation-planning of research and
other activities performed with the aid of expert advisors prior to start-up-the
greater the success they later attain.
3
Clearly, there is an important Iesson in
these findings for entrepreneurs, and they serve to underscore the importance of
the planning aspect of good business plans.
Business Plans: An Alternative Approach
Now, having made these points, we should balance the scales by noting that a
businessplan is a living document, one that can-and perhaps should-change
often as a new business develops. Because entrepreneurs can never know in
advance just how their new businesswill develop, how much planning they can
do is limited. For this reason, successful entrepreneurs often avoid "analysis
paralysis" in which they spend countless hours in the library developing long,
formal business plans with lots of data and assumptions, fancy spreadsheets,
and beautifu1 illustrations. Instead, they do just enough business planning to get
their new companies started, and then use the information that they gather from
actually running their new ventures to refine their plans in the light of reality. In
essence, the successful entrepreneur' s business planning model often Iooks
something like this: (1) develop a simple, basic business plan, (2) start the
business, (3) take the inforrnation that is gained from starting and running the
new business and use it to refine the plan and obtain funding as it becomes
necessary. For example, consider Alex D' Arbeloff, faunder of Teradyne, a large
scientific instruments cornpany. When D' Arbelaff founded his company, he
wrote a short business plan only a few pages in length. He assumed he would
derive little benefit from developing a long, detailed business plan made up
mostly of assumptions and analysis of data resting on largely unsupported
assumptions. Rather, it was better to focus on the key pieces of information that
he knew tobe true and get the business started. Then, once the business was up
and running, he revised hisbusinessplan many times, adding new information
as it was acquired. D' Arbeloff' s success as an entrepreneur made him quite
wealthy, and he now works as a business angel who has backed such notable
companies as Lotus. As a business angel, he maintains the same philosophy that
he used when he started his own company: Look for entrepreneurs who have
written simple, Straightforward business plans that focus on key dimensions of
business opportunities and treat their business plans as "living documents"
that change and develop a1ong with their new ventures.
208 PART l Assembling the Resources
Figure 7.2
A Model of Business Planning
Used by Many Successful
Entrerpneurs
Many successful entrepreneurs write
relatively simple business plans based
on information they actually know
rather than on untested assumptions.
Then they start their businesses and
use the information they gain from
running them to refine their business
plans as weil as to secure additional
funding as needed. The cycle con-
tinues, thus making business plans
true "living documents" that are open
to change in response to new
information
. Prepare a
relatively simple
business plan,
which can be
used 'to obtciin
initiC,ti Fimding.if'
itis needed .
Refine. the business
plan on 'the basis of
99ined from
r:unnin9.
and lhe plpn .
to and
funding

Coili1nueki


.

The advantages of this approach are obvious: Entrepreneurs can spend
their time getting their business started rather than on writing a formal business
plan, and thus have something tangible to "sell" when they finally do seek !arge
amounts of outside funding to expand their growing businesses (see Figure 7.2
for a summary of the model of business planning we have just described).
So overall, is it better to start with a long, detailed business plan or a
shorter and simpler one? As you can guess, the answer is, "it depends." In
some situations, a long and detailed plan is necessary-for instance, when
!arge amounts of funding are required to Iaunch the new venture or the
market for it is not immediately clear. In others, a shorter and less detailed
plan will suffice-as long as it provides sufficient guidance to get the business
started, and it is changed "on the fly" to reflect new information as it becomes
available. The guiding rule, then, is to always engage in careful preparation
and planning, but to be flexible and to match the form of the business plan you
develop to the specific needs of your new venture.
13u5irleJ-5- Plans fAy a 70tJt
5uppt;.1/;
As we already noted, few entrepreneurs enjoy the task of creating a detailed
business plan. And, sad to relate, many don't recognize the value to them
of writing one-they don't appreciate the value of working through many
details involved in launehing and running their new business. In contrast,
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C HA? TE R 7 Writing an Effective Business Plan: BuHding a Roadmap to Success 209
almost all recognize that good business plans are
important. tools for obtaining financial resources.
They realize that venture capitalists, business angels,
and other investors generally want to have the infor-
mation presented in business plans before comrnitting
their funds to almost any new venture.
In a sense, this is a reasonable requirement: Why
would anyone invest sizeable amounts of money in a
company without knowing, in advance, what it will do,
what markets it will serve, how it will gain competitive
advantage, and-perhaps most importantly-what
skills, experience, and ability the founding team brings
to the new venture. So the fact that many VCs and
other investors insist on seeing a carefully constructed
business plan as a kind of "entry card" to the entire
process of fi.nancing is far from surprising. In fact, most
insist on seeing all of the kinds of information described in the next section of
this chapter-information provided by key components of a good business
plan.
What is more surprising, however, is the way in which VCs and other
investors process and evaluate this information. Ideally, all of the informa-
tion would be carefully considered and combined into an overall evaluation
of the new venture and its chances of success. In fact, however, a large body
of evidence indicates that investors tend to base their decision largely on four
major types of information: (1) the founding team's capabilities, (2) the
attractiveness of the product or service, (3) potential markets and existing
or potential competitors, and (4) potential returns if the venture is successful
4
(see Figure 7.3). This means that although many kinds of information
presented in business plans are important, entrepreneurs should, perhaps,
make special efforts to assure that infonnation relating to these issues is
presented clearly and convincingly. We'll consider the actual process
through which VCs and other investors rnake their decisions about new
ventures in a later section. Here, we merely wish to ernphasize that good
business plans are indeed a basic requirernent for obtaining financial support in
rnany cases, and are important docurnents to entrepreneurs for this reason.
Components of a Business Plan:
Basic Requirements
Dusiness plans are as different in their spedfic contents as the individuals
who prepare thern. Overall, though, they generally contain a nurnber of basic
sections that, together, address key questions anyone shoukl ask before
investing in a new venture:
m What is the basic idea for the new product of service? In other words, what
is the opportunity being developed?
'I Why is this new product useful or appealing-and to whom?
!Ii How will the idea for the new venture be realized-what is the overall plan
for making the product (or affering the service), for rnarketing it, for
dealing with existing and future cornpetition?
Ii! Who are the entrepreneurs-da they have the required knowledge,
experience, and skills to develop this idea and to run a new company?
~ How will the new venture be structured, and how will it operate once it is
launched?
Figure 7.3
Key Aspects of Information
in Business Plans
Research findings indicate that
venture capita/ists and other
investors view the four kinds of
information shown here as crucial
in their decisions about whether to
provide financial support to new
ventures. (Based on information in
Zacharakis & Meyer, 2000; see
note 4.)
210 PART 1 Assembling the Resources
learning 2
objective
Explain how the process of
persuasion plays a key role in
business plans and in the
success of new ventures.
il If the plan is designed to raise money, how much funding is needed,
what type of financing is required, how will it be used, and how will
both the entrepreneurs and other individuals realize a return on their
investment?
As you can see, these basic and important questions are the kind you
would ask before making an investment in a start-up company. A well-
prepared business plan addresses all these questions and inany others,
too. Moreover, it does so in an orderly, succinct, ~ n d persuasive fashion. Pay
careful attention to these words, because they are truly crucial ones. As we
noted earlier, the gniat majority of all business plans are rejected within a few
minutes by experienced venture capitalists who see hundreds or
even thousands of such documents each year. As a result of this experience,
they employ what might be described as "personal filters" to determine which
business plans are worthy of their time and which they can quickly discard. As
an entrepreneur, you want to do everything in your power to assure that your
business plan is one of the few that receives more than a quick glance. And
that effort requires careful attention to several basic principles:
Ii! The plan should be arranged and prepared in proper business form: It should
start with a cover page showing the name and.address of the company and
the names and contact information (telephone, e-mail, etc.) for key contact
people. This information should be followed by a clear table of contents
outlining the major sections. The table of contents should then be followed
by an executive summary (more on this aspect shortlyt which in turn
should be followed by the major sections of the plan, each clearly headed
and identified. Various appendices (e.g., detailed financial projections,
complete resumes for the company' s founders and key personnel, etc.)
follow, often bound separately. Overall, the entire plan should adhere to
this basic rule: It should have the appearance of a serious business
document, but should not seek to "wow" readers with showy illustrations
or super-creative use of formats or styles. Remernher that the first
impression you make on venture capitalists, bankers, and other people
important to your company's futurewill be rnade by your business plan,
so make sure that it Iooks like what it is-a serious document prepared by
serious people!
ll1 The plan should be succinct: This point is absolutely crucial; no one-not
even your own family members-will plow through hundreds of pages of
dense, convoluted prose (or complex financial figures). An effective
business plan, therefore should be as short and succinct as possible.
Anything more than 40-50 pages is almost certainly overkill, and in
general, the shorter the better. In fact, many experts agree that 25-35 pages
should be sufficient for alrnost all plans. Some however, can be much
shorter. For instance, the business plan submitted by Teradyne was six
pages in length, and that for Lotus Development, tcn pages. The key goal
is to address the major questions (what, why, how, who, and how much?)
in a clear and intelligent manner, without needless detail or redundancy.
Always keep in mind that the people you want to read your plan are both
very busy and highly experienced: They know how to cut rapidly to the
heart of what your business is all about-and to teil whether you are smart
. enough to present it clearly.
lll The plan should be persuasive: As we noted earlier, as an entrepreneur, you
face a highly competitive situation in which you will have a small window
of opportunity: Either you seize the attention and interest of the people
who read your plan early on and have additional chances to persuade
them, or they conclude, often within minutes, that reading further would
be a waste of time.
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C HA PT ER 7 Writing an Effective Business Plan: Building a Roadmap to Success 211
It is sirnply a fact of life: Experienced decision rnakers operate this way in
many business contexts, not just with respect to evaluating business plans. For
instance, research on job interviews indicates that many interviewers
their judgrnent about the suitability of each applicant within aminute or two.
5
Why? They sirnply don't have time to waste on applicants who are clearly not
suitable, so they reach a decision about whether to continue the disCU$sion
very early in the process. If their decision is "this person is not suitable," they
conclude the interview quickly. If, instead, they decide "this candidate could .,_ .
be a good employee," they keep it going in order to acquire moreinformation ..
The same principle is at work with respect to business plans: becisions are
made quickly by venture capitalists and other potential source8 of funding
and are rarely, if ever, reversed.
6
In other words, you rnust begin strong, and
continue strong if you want to succeed. And the place where a business plan
begins is the executive summary-the first rnajor cornponent of business plan
and, in sorne ways, the rnost irnportant.
Where will inforrnation for the businessplan corne frorn? The answer, in
part, is frorn the careful feasibility analysis entrepreneurs should perform before
proceeding far into the process (see Chapter 4). This prelirninary work should
provide investors with valuable information about feasibility of the product or
service, the industry in which the new cornpany will operate, potential
markets, competitors, and the founding team's ability to run the company. So
in a sense, if entrepreneurs begin as they should, they will have much of the
information they need to write a strong business plan at their fingertips-<>r at
least, they will be close to obtaining this information.
One additional point: We want to ernphasize that, ultirnately, the quality
of the idea behind the new venture and the quality (experience, expertise,
skills) of the individual(s) who put it together are the crucial elements.
Experienced investorswill quickly recognize whether the idea is sound and
has economic potential, no matter how well-written or persuasive the plan
appears tobe. So before you decide to invest large arnounts of time and effort
into preparing a super-impressive business plan, you absolutely must get
feedback on the idea behind your new venture. If this response is. not
encouraging, stop right there, because proceeding is alrnost certain to be a
waste of time.

Have you ever heard the phrase elevator pitch? One of us (Robert Baron) first
became familiar with it while working at a government agency (as a program
director at the National Science Foundation). He observed that many of his
more experienced colleagues went to lunch at a specific time each day and that
theyjockeyed for position in front of the elevator. Why? Because they wanted
to stand next to the assistant director--the person who made key tlecisions
about how funds available to this part of the agency would be distributed.
They knew that the director would be standing on the elevator when the door
opened, because her office was on a higher floor. (If she was not, they would
wait for the next elevator and check that one.) On the way down to the street,
they rnade their "elevator pitches"-brief but irnpassioned statements about
the wonderful things going on in their particular areas of science, and why
funding of such work would be a great investment (see Figure 7.4). The
director usually rnade no concrete response, but in a few cases, she could be
heard to rernark, ''That sounds interesting ... make an appointment so we can
discuss it." That statement signified great success because it meant that the
one- or two-minute "pitch" delivered in the elevator had at least opened the
door to further discussions-and the real possibility of additional funding.
The rnoral of such situations is clear: Often, we have just a brief opportunity
to stimulate another person's interest-to get them interested enough to want
[earning 3
objective
Explain why the
executive summary is
an important part of any
business plan.
212 f' ART 2 Assembling the Resources
Figure 7.4
The "Elevator Pitch": For
Entrepreneurs, the Executive
Summary Can be the Equivalent
/n "elevator pitches," individuals try
to convince others of the value of
their ideas during a short elevator
ride. For entrepreneurs, the execu-
tive summary of the business plan
can serve a similar fundion: lf it is
weil written, it may seize the
attention and interest of potential
iiwestors-and so induce them to
give careful consideration to the
entire plan for a new venture.
learning 4
objective
Describe the major sections of
a business plan and the type of
information they should include.
to learn rnore. And that, in essence, is the purpose of
the executive summary. This part of the business
plan-which should be brief and to the point (many
experienced investors suggest 2-3 pages at most),
should provide a brief, clear, and persuasive over-
view of what the new venture is all about. In essence,
~ it should provide brief answers to all the questions
.E listed earlier: What is the idea behind the opportunity-
"i the idea for the new product or service? Why will it be
~ appealing, and to whom? Who are the entrepreneurs?
~ And how much funding (and in what form) are they
;;:
x seeking?
..,
~ Can conveying all this information be accom-
9 plished within a brief format? Absolutely. But it
requires careful writing that delivers a lot of informa-
tion per sentence, yet still transmits the entrepreneurs' excitement and
enthusiasm. We wish we could provide you with a few simple rules for
writing such a document, but in fact, we cannot: The precise contents will
depend on the specific idea being presented. Whatever the idea is, the
executive stimmary should answer key questions briefly, yet in enough detail
so that a reader can form a clear picture of what this new venture is all about.
Remember: The executive summary is a very important part of the business
plan, so it is worthy of special effort. It is your first and best chance (and often
your only chance!) to generate interest among potential investors, so by all
means, make it your best shot in all respects.
After the executive summary,- major sections follow in an orderly
arrangement. Many arrangements of these key sections are possible, but
here is one arrangement used in many business plans and that seems quite
logical. The specific order of the sections-as well as their content-however,
should be dictated by the nature of the idea and what you are trying to
communicate in the plan, not by any hard-and-fast preset rules.
~ Background, Purpose, and Opportunity: A section describing the idea
(the opportunity) and the current state of the new venture.
l!l Marketing: A section describing the market for the new product or
service-who will want to use or buy it and-more importantly, why they
would want to do so and how these potential customers will be reached.
11 Competition: Information on existing competition and how it will be
overcome, pricing, and related issues. (Sometimes this isaseparate section,
and sometimes it is included in the marketing section.)
lll Development, Production, and Location: Where the product or service is
right now in terms of development, how it will move toward actual
production or delivery (service), where the new venture will be located, and
so on. Information on operations can also be included in Lhis section (how
the new businesswill operate, whether it will seek corporate partners, etc.).
!t1 Management: A section describing the human capital of the new venture's
founding team-their experience, skills, and knowledge-and also what
human resources they will need to acquire in the months ahead.
Information on current ownership of the company should be included.
~ Financial Section: This section provides information on the company's
current financial state and offers projections for future needs, revenues,
and other financial measures. It should also include information on the
amount of funding being sought, when such funds are required, and how
they will be used, cash flow, and a breakeven analysis.
& Risk Factors: This section discusses various risks the new venture will face
and the steps the management team is taking to protect against them.
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Writing an Effective Business Plan: Building a Rciadmap to Success
m Harvest or Exit: Investors are interested in understanding precisely how
they will gain if the company is successful, so information on this
important issue (e.g., when and how the company might go public) can
often be very useful.
;; Scheduling and Milestones: Information on when each phase of the new
venture will be completed should be included, so that potential investors
will know just when key tasks (e.g., start of production, time to first sales,
projected breakeven point) will be completed. This can be a separate
section, or included in other sections, as appropriate.
v. Appendices: Here is where detailed financial information and detailed
resumes of the founding team should be presented.
To be cornplete, all business plans must cover these and closely related
topics. However, depending on the specific nature of the new venture, the
order can be altered and the relative length adjusted. In other words, there are
no hard-and-fast rules about how long or detailed each section should be;
rather, this is a matter of good business judgment.
Now that we've provided an overview of the key sections included
in a sound business plan, we'll describe each of these sections in more
detail.
P'Wc/ud Md
Among the first things potential investors in your new venture want to know
are facts relating to the background of the product and the company and what,
specifically, the entrepreneurs hope to accomplish-in other words, what
opportunity have they identified and how do they plan to exploit it? As we
noted in Chapters 2 an:d 3, ideas for new products or services do not arise in a
vacuum; rather, such opportunities emerge out of changing economic,
technological, and social conditions and are then recognized by specific
people who take action to develop them. A key question for potential
investors, then, is: "What is the nature of the idea driving the company and
how did it arise?" The answer will often require discussing conditions in the
company' s industry, because it is these conditions, in part, that suggested the
idea the entrepreneurs are now seeking to develop. For instance, suppose an
entrepreneur developed a new material that gives the soles of shoes much
better traction than any material now on the market. Potential investors will
want to know why this feature is useful and who will want to use the new
material (e.g., manufacturers of athletic shoes? manufacturers of medical
devices for people who have been hurt in accidents or who have brittle
bones?). In other words, this section should explain what the product has to
offer-why it is unique and valuable, and therefore has potential for
generating future profits. Unless Lhese issues aH! atltlresseu dearly, investors
are likely to conclude that the risks far outweigh potential benefits.
Investors also usually want basic information about the existing
company-its legal form (see Chapter 8), its current ownership, and its
present financial condition. After all, no one wants to invest in a new venture
in which sensitive issues of ownership exist or one that has excessively high
overhead.
This section of the business plan should also address the company' s goals:
What does it hope to accomplish? Returning to the new material for shoes
described above, this section should clarify whether it V\>ill be generally useful,
for all kinds of shoes or only for some (e.g., running shoes), as well as the
benefits its use will confer. For instance, perhaps many thousands of people
are injured in falls each year, and these injuries can be prevented through use
of the new material. In that case, thesepotential benefits should be mentioned
211
214 PAR 1' 1 Assembling the Resources
Figure 7.5
Market Analysis: Sometimes
Uncertain, But Always Essential
Entrepreneurs should always devote
careful attention to the fo/towing
question: "What is the need for our
product or service?" Why, in other
words, would anyone want to buy or
use it? Market research can often
hefp to answer this question, which is
what the founders of Critter Rescue,
lnc., did before developing their /ife
size manikins of animals. These
manikins are now gaining acceptance
for training veterinarians and in
training emergency rescue teams; in
fact, the American Red Cross
recently became a customer. This
exnmple i/lustrntes thP. importanre
of includlng Information on potential
markets in any good business plan.
along with financial ones that will stem from the company's success. But
again, the usefulness of such information depends on the idea behind the new
venture and is rnore appropriate for sorne than others. It, like everything else
in the plan, should only be included if it is relevant and will contribute to both
planning by the entrepreneurs and to their ability to cornrnunicate the nature
of the company to others.
In sum, after reading this initial section, potential investors will
understand the opportunity the new venture hopes to develop, the basic
nature of the entrepreneur's company (its legal form, ownership, history),
what it is that makes this product or service valuable or unique, and what the
new venture will seek to accomplish-a brief statement of its mission or key
goals. Together, this information provides a useful framework for under-
standing later sections of the business plan, so it is important that it be
presented first.
aM!ffuy
Many products that corne to market disappear quickly and without a ripple.
The potential rnarkets for which they are intended either ignore them or do
not develop, and the result is economic disaster for the entrepreneurs who
developed these products or services and for investors in their new ventures.
In fact, as we noted in Chapter 1, most new ventures fail within three years,
so this outcorne is far from a rare chain of events; on the contrary, it is all
too common.
Given this fact, it is not surprising that sophisticated investors want to see
specific and detailed information concerning marketing as part of any strong
business plan. Specifically, they want information on what entrepreneurs have
done to identify the market for their product (e.g., have they conducted
rnarketing surveys? detailed market analyses?). Moreover, they want to know
how large these markets are, whether they are growing or shrinking, and how
the new products or serviceswill be promoted in these markets. This section
often requires detailed information about competing products (Do they exist? lf
so, how will the new product be demonstrably superior to them?); competing
companies (Who are the competitors? How are they likely to respond to the
entrepreneurs' new product?); and pricing (How will the new product or
service be priced relative to competing products or services? Why does this
pricing strategy make sense?).
For instance, consider one young cornpany, Rescue Critters, Inc.-a
company that produces life-size manikins (models) of anirnals. What markets
exist for such products? What are existing, competing products like? The
founders of this company-Craig Jones and Jacqui Pruneda-had experience
in emergency medicine and also in pel first aid. They knew from this
experienr.e that the modP.Is usP.d in training veterinarians and emergency
workers who rescue animals from dangeraus situations were not at all
lifelike. Craig Jones also had contacts in the movie special-
effects industry, and he used these contacts to create prototypes
.!! of anirnals that were much more realistic than the ones
currently being used. When these prototypes were market-
<'5 tested with instructors at veterinary medicine schools and
..
emergency rescue workers, they received positive reactions
..
er (see Figure 7.5). As a result, Jones and Pruneda could show

these rnarketing data to potential investors to obtain the
support they sought? They did, and the company they
launched is off to a flying start; in fact, it recently won the
American Red Cross as a major customer. In short, by doing
}i
2
appropriate market research, the founders of Rescue Critters,
0
&. Inc., could demonstrate to potential investors that they knew
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C HA PT ER 7 Writing an Effective Business Plan: Building a Roadmap to Success 215
the market for their products and had evidence that the products would gain
acceptance in these markets.
In essence, this section of a new venture's business plan should be
designed to convince skeptical investors that the entrepreneurs have done
their homework: They have examined potential markets for their product or
se!Vice carefully, and have obtained evidence indicating that consumers or
other businesses (depending on the product or service) will actually want to
buy it when it becomes available. Further, investors want to know the specifics
of how the new product or service will be promoted, and at what cost. Market
projections are, of course, always uncertain; and no one ever knows for certain
how consumers will react to new products, no matter how carefully they are
market tested. But at the very least, the entrepreneur should have engaged in
appropriate efforts to find out why people will want to buy or use their
product, and to pinpoint an effective marketing strategy for it. If, instead, it is
simply assumed that the product or service is so wonderful that people will
line up to buy it, a loud alarm will sound in the minds of sophisticated
investors, and they will quickly lose interest.
It's not possible to market a new product or service unless it is available, so
two other issues that must be carefully addressed in any effective business
plan are product development and production. Potential investors want informa-
tion about where the new venture's products and services are in this process:
Are they still under development? Or are they fully developed and ready to be
manufactured? And if so, what are the projected costs and tirnetable for
making the product or for delivering the service? Related issues include steps
to assure quality and safety for consumers or other users (e.g., has the
company applied for Underwriter' s Labaratory Approval or similar certifica-
tion?). As one of us (Baron) learned while running his own company, such
processes can require months-and large fees-so investors want to know that
entrepreneurs are aware of these issues and have them weil in hand (see
Figure 7.6).
The further along a start-up company is with respect to these issues, the
more attractive it will be to potential investors-not simply because the
company has developed beyond the initial launch phase, but also because
this progress dernonstrates that it is operating in a productive and rational
manner.
7 h ~ 1 1 1 ~ 'TeaJn
Many venture capitalists note that they would rather invest in a first-rate
team with a mediocre idea than a rnediocre team with a first-rate idea.
Although this statement is something of an exaggeration-venture capitalists
and other investors actually tocus on many diHerent issues-it does contain a
substantial grain of truth. What venture capitalists are saying, in essence, is
that talented, experienced, and motivated people at the top of a new venture
are important for its success. For this reason, a key section of any business
plan is the one dealing with the people who will run the new venture.
What, specifically, do potential investors want to know? Primarily that,
taken together, these people have the experience, expertise, skills, and
personal characteristics needed to run the new venture successfully. We say
"taken together," because as we pointed out in Chapter 5, investors want to
know that the rnanagement team has complementary skills, abilities, and
experience; what one member of the founding team lacks, others provide, and
vice versa. Further, they want to be reasonably certain that the members
of the team have developed good working relationships; each has clearly
Figure 7.6
Information on Product
Development and Production:
An Essential Part of Effective
Business Plans
Effective business plans provide
detailed information about where
products stand with respect to
development and how they can be
manufactured (e.g., costs, schedules,
etc.). In addition, issues relating to
product quafity and safety should
be addressed-issues such as ap-
proval by Underwriters Labaratory
or simi/ar organizations.
216 ? ART 1 Assembling the Resources
assigned roles and duties, and communication between them is good. Even if
investors may be willing tobend these requirements to a degree-for instance,
they can't really require lots of experience from a young group of
entrepreneurs-they do demand that at least some of them be rnet. If the
management team of a new venture is lacking in experience, for instance,
investors may require that the entrepreneurs hire seasoned executives to assist
in running the business-in other words, that they acquire needed experience
from outside the new venture team. Similarly, if entrepreneurs are lacking
in experience, investors rnay place greater weight on their training, their
intelligence, and their interpersonal skills. Seasoned investors know from
past experience that entrepreneurs who are good at getting along with others
are more likely to succeed than ones who are "rough araund the edges" and
annoy or irritate the people with whom they deal. After all, why should
anyone give their business to a stranger who rubs them the wrong way?
Surely, it would take a vastly superior product or service to tip the balance this
way. Andin fact, research findings indicate that entrepreneurs who arehigh in
social skills are indeed rnore successful in running new ventures than ones
who are not.
8
In short, potential investors place a great deal of emphasis on the
qualifications of entrepreneurs, and do everything they can to assure that
the companies they fund are headed by people in whom they can have
confidence. The source of such confidence is, ideally, past business experi-
ence, but if experience is lacking, potential investors will seek to assure that
this possible wea:kness is offset by other strengths brought to the table by the
founding team: high intelligence (social and cognitive), a high Ievel of
technical skill, and yes, energy and enthusiasm! In other words, they want to
be sure that the human capital of the new venture is sufficient to the
challenges it will face. If it is not, they will think lang and hard about affering
financial support.
"Fillaluiat Plans- und P'Wjedi/Jny
Every section of a business plan is important, but one that is absolutely certain
to receive close exarnination is the section dealing with financial matters.
This section should include several major cornponents, each of which must be
carefully prepared. As we explained in Chapter 6, these elements provide a
picture of the company's current financial state, how it will use funds it
receives from investors, and how it will manage its financial resources to reach
its major objectives.
The financial section should provide an assessment of what assets the
venture will own, what debt it will have, and so on. As Chapter 6 explained,
such information is sumrnarized in a proforma balance sheet, shuwing
projections of the company's financial condition at various times in the
future; such information should be projected serniannually for the first three
years. These projected balance sheets allow investors to deterrnine whether
debt-to-equity ratios, working capital, inventory turnover, and other finan-
cial indices are within acceptable Iimits and justify initial and future funding
of the cornpany: In addition, as Chapter 6 explained, a proforma income
statement should be prepared to illustrate projected operating results based
on profit and lass. This statement records sales, costs of goods sold, expenses,
and profit or loss, and should take careful account of sales forecasts,
production costs, costs of advertising, distribution, storage, and administra-
tive expenses. In short, it should provide a reasonable projection of operating
results. Finally a cash flow statement showing the amount and timing of
expected cash inflows and outflows should be prepared, again for a period
of several years. By highlighting expected sales and capital expenditures
over a specific period of time, this forecast will underscore the need for
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C HA PT ER 7 Writing an Effective Business Plan: Building a Roadmap to Success 217
lncludes sates as they are generated
lncludes depreciation
lnterest on loans is included
Beginning inventory and ending inventory are
included in the calculation of cost of goods sold
Shows sales a8 "Cash in" only when
payment is received
Depreciation is added back in because
it is not a .cash expense
8oth interest and principal are included
lnventory purchases are recorded as bills
when they are actually paid
and timing of further financing and needs fr working capital. Many
beginning entrepreneurs are unclear about the difference between income
statements and cash flow statements, so we have highlighted these distinctions
in Table 7.1
Another key part of the financial section-one also discussed in Chapter 6-
be a breakeven analysis, a table showing the Ievel of sales (and
production) needed to cover all costs. This analysis should include costs that
vary with the Ievel of production (manufacturing, Iabor, materials, sales),
and costs that do not vary with production (interest charges, salaries, rent,
etc.). The breakeven analysis is an important reality check for entrepreneurs,
who often have an overly optimistic view of how quickly their new venture
can become profitable, and it is often examined with considerable care by
potentialinvestors.
Overall, the financial section of the business plan should provide
potential :investors with a clear picture of how the new venture will use
the resources it already has, resources generated by continuing operations,
and resources provided by investors to move toward its financial objectives.
If there is any section in which entrepreneurs should strive to hold their
enthusiasm and optimism in check, this is it: Many investors have learned to
view entrepreneurs' financial projects with a healthy dose of skepticism.
They have seen too many overly optimistic predictions to view the situation
otherwise; in fact, many begin by discounting entrepreneurs' projections by a
minimum of 50 percent!
C'titicd 1Je5dti61nf 7l/hat
You probably know this saying, known as Murphy's Law: "If anything can go
wrong, it will." And perhaps you know the corollary too: ''Murphy was an
optimist." Entrepreneurs, filled with enthusiasm for their new ventures, are
not thP. most likP-ly candidates on earth to think hard and long about what can
go wrang with respect to their new ventures. On the contrary, they prefer to
focus on the upside and are often genuinely dismayed when things do not go
according to plan. This is one reason why effective business plans should
contain a section specifically focused on what rnight potentially go wrong-
critical risks that can prevent the new venture from reaching its key objectives.
Thinking about these risks is 1/good medicine" for entrepreneurs, and formu-
fating ways of responding to thesepotential calarnities before they occur can
be constructive indeed!
What are the potential risks new ventures face? Here is a partial !ist:
li Price cutting by competitors, who refuse to "roll over and play dead" for
the new venture
"' Unforeseen industry trends that make the new venture's product or
service less desirable-or less marketable than was true initially (see
Figure 7.7 for an example)
Table 7.1
Statements and Cash
Aow Statements: Some'Key

As shown here, income statemf!crts
and cash flow statements dirlitt in .
severa( importeint respects .. .
218 PART 2 Assembling the Resources
Figure 7.7
New Ventures Face Many Risks
Sometimes, unforeseen trends
combine to sink a new venture afmost
before it has begun. For instance, in
the fate 1990s, a new venture caUed
HandsOff was started to provide the
owne of personal compute with
antitheft devices. Before the company
coufd actuafly bring its products to
market; the price of such computers
dropped so fow that interest in
purchasing antitheft devices aU but
disappeared The resuft? HandsOff
quickfy exhausted its resources
and went out of business.
11 Sales projections that are not achieved for a variety of reasons,
thus reducing cash flow
11 Design, manufacturing, or shipping costs that exceed estimates
111 Product developrnent or production schedules that are not met
~ Problems sternming from top managernent's lack of experience
(e.g., their inability to negotiate favorable contracts with sup-
pliers or customers)
m Longer than expected lead tirnes with respect to obtaining parts
or raw materials
Ii Difficulties in raising additional required financing
~ e Unforeseen political, economic, social, or technological trends or
developments (e.g., new governrnent legislation or the sudden
start of a major recession)
These issues are just a few of the many potential risks that can
put new ventures badly off the track-and to emphasize a point we
rnade previously, many are truly unexpected. For instance, consider
Stephanie Arme, Inc., a Dallas-based company that produces ultra-
high-quality children's furniture. The cornpany ran into serious
problerns when many of its products were damaged during out-of-
town shiprnents, despite the fact that they were shipped through a
large moving company. The solution? Custorn packaging that
protected the products even through rough handling.
If so rnany potential risks faced by new ventures are frightening to
contemplate, why should entrepreneurs describe them in detail in their
business plans? Mainly because recogni,zing these dangers is the first step
toward developing strategies to deal with them if they do, in fact, occur.
Writing a section dealing with current and potential risks obliges entrepre-
neurs to think about these issues and to take them into account in planning
their business model and business strategies.
1 Z ~ ~ I-he 1ZwU!tdY: HaJWe>t und ~ d
All good things must come to an end, and even the most enthusiastic of
entrepreneurs realizes that at some point, they rnay want to leave the
cornpanies they start. Ibis moment can occur when they reach a stagein life
where they want to sit back a bit and enjoy the fruits of their Iabors or,
alternatively, when they crave the excitement of starting something new, so
they want to launch yet another new venture. Whatever the reason, every
business plan should include a section that describes both management
succession-how the founding entreprencurs can ultirnately be replaced-
and exit strategies for investors that explain how they can ultirnately reap the
benefits of having funded the new venture. lnitially, ownership of a new
venture is not a liquid asset: Shares cannot readily be sold to others. Later,
however, this level of liquidity can change radically if the cornpany has an
initial public ffering (IPO) and its shares are subsequently traded on a
national exchange. The business plan should address this and other potential
exit strategies for investors, and for founding team mernbers too. In fact, this
section is often irnportant to investors who fully understand the Arab proverb:
"Think of the going out before you enter."
5 ~ und lntiesmney
A final section in the body of the business plan should address the question
of when rnajor activities will be perforrned and when key milestones will
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C HA PT ER 7 Writing an Effective Business Plan: Building a Roadmap to Success 219
be reached. Again, giving careful thought to the question of when various
tasks will be performed or specific goals achieved is useful both for
entrepreneurs and potential investors. Identifying target dates may help
entrepreneurs overcome a powerful cognitive bias known as the planning
fallacy that we described in Chapter 3-the tendency to assume that we can
accomplish more in a given period of time than is really possible.
9
Careful
scheduling can serve as important reality check. From the point of view of
investors, it indicates that entreprenet,.ITs are indeed paying attention to the
operations of their company and have developed clear plans for its future
progress. What are these milestones? Included among the most important
are the following:
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Formal incorporation of the new venture (if it has not already occurred)
Campletion of product or service design
Campletion of prototypes
Hiring of initial personnel (sales or otherwise)
Product display at trade shows
Reaching agreements with distributors and suppliers
Reaching agreements with corporate partners if these are desired-
companies with whom the new venture will work closely and for mutual
benefit
Moving into actual production
Receipt of initial orders
First sales and deliveries
Profitability
This Iist is just a small sample of the many milestones new ventures can
include in their business plans; many others exist as weil. The important point
is to select milestones that make sense both from the point of view of the
company' s resources and the _industry in which it is located.
Upf?&zdice5-
Because the main body of the plan should be relatively brief-as short as is
adequate for presenting all essential information-several items are best
included in separate appendices. Items typically included are detailed
financial projections and full resumes of the founders and other members of
the top management team. By placing such items in appendices, entrepreneurs
assure that this important information is present for anyone who wishes to
examine it, but at the same time keep the length of the business plan itself
within desirable Iimits.
a 71ote on t1te s ~ l e y
What we have described in the preceding section is an outline of the
essentials-the sections that are generally viewed as necessary for any
thorough business plan. What wehaven't addressed, of course, is what might
be termed the intangibles-the extra "something" that Ieads readers of a plan
to drop their slightly jaded attitude and to conclude, perhaps with some
excitement, that sornething here is worth a closer Iook. Because we have both
done a !arge amount of writing, we believe that such factors as organization,
clarity, choice of words, and style do indeed matter. Unfortunately, no one has
yet been able to draw a bead onhow these factors operate or how you can turn
them to your own advantage. Given the importance of the business plan in the
220 PART 1 Assembling the Resources
learning 5
objective
future of your new venture, however, we do have a concrete suggestion:
Before distributing it to potential investors, have a number of people who are
known tobe good writers read it. lf they will do it as a favor, that's great; if
not, pay them for their time. And then Iisten carefully to their suggestions, and
revise the plan accordingly. Honestly, we can't think of anything eise you can
do that is likely to yield as much benefit for you and for your new venture.
(What about the downside? What specific errors you should be careful to
avoid because they can be the '1dss of death" to any business plan? Wehave
atternpted to surnmarize the most important of these ih the Danger! Pitfall
Ahead! section below.)
Describe the "seven deadly
sins" of business plans-errors
all entrepreneurs should avoid.
. The Seven Deacily Sins for New Venture
Plans
Let us say it again: less than five minutes.
That's the amoont of time your plan has in the
hands of many potential investors before they
dei:::ide to turn "thumbs up" or "thumbs down"
on it. ln other words, they evaluate a document
that may have taken you weeks or even months
to prepare in just a few moments. For this
reason, it is absolutely imperative that you
avoid errors that will doom your plan to the
rejection pile no matter how good other sections
of it may be. We term these blunders the "Seven
Deadly Sihs of New Venture Business Plans,"
and here they are for you to recognize-and avoid:
Sin #1: The plan is poody prepared and
has an unprofessional Iook (e.g., no cover
page, a cover page without contact information,
glaring typos). This carelessness triggers the
foffowing investor reaction: "l'm dealing with a
group ofamateurs." .
Sin #2: The plan is far too slick (e.g., it is
bound like a book, is printod on shiny papcr, nnd
uses flashy graphics). This Ieads investors to
think: "What are they trying to hide behind afl
that glitter?"
Sin #3: The executive summary is too
long and rambling-it doesn't get right
to the point. This failure to be concise Ieads
investors to think: "lf they can't describe their
own idea and company succinctly, I don't want
.to waste my time-and certainly not my
money:..;on theni."
Sin #4: lt's notclear where product is
in terins of deveiopment-does it exist or
not? Can it be readlly mantifactured? lf
investors have to ask these questions, they may
concfude: "I can't teff whether this is real or just
another pipedream; l'lf pass on this one."
Sin #5: No clear answer is provided to the
question: "Why would anyone ever want
to buy one?" Many entrepreneurs seem to
assume that their new product or service is so
wonderful that it will virtually sell itself. This kind
of blind faith on the part of entrepreneurs Ieads
investors to think: "How na.'ive can you get?
Even a machine that grew hair on the heads of
bald men would need a marketing plan. These
are truly amateurs."
Sin #6: 1t gives no dear statemen.t of the
qualifications of the management team:
This oversight Ieads investors to conclude:
"They probably have no relevant experiEmce-
arid may not even know what relevant experi-
ence would be!"
Sin #7: Financlal projections are largely an
exercise in wishful thinking: This overop-
timisin Ieads potential investors to conclude:
"They have no idea about what it is like to run a
company, or(even worse) they think I am
incredibly na't\te or stupid. Pass!"
These "7 Deadly Sins" are summarized in
Figure 7.8.
The moral is clear: keep a sharp lookout for
these deadly errors, because if you commit even
one, your chance of obtaining financial support
and other forms of help from sophisticated
investors will fade quickly.
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Writing an Effective Business Plan: Building a Roadmap to Success 221
Figure 7.8 The Seven Deadly Sins for New Venture Business Plans
tf one or more of these errors or problems are present in a business plan, it is /ike/y to be
rejected by potential investors, no matter how good other aspects of the plan may be.
The plan is far too
slick
The executive summary
is too long and does
not get to the point
lt is not dear where the
product is with respect
to production
lt is not dear why anyone
would want to buy the
product or service
The plan is poorly
prepared; Iooks
unprofessional
No cleat statement of the
qualifications of the
management team
Financial projections are
wildly and unreasonably
oplimistic
222 ,. r. .,, 2 Assembling the Resources
learning
objective
6
Explain how venture capitalists
actually make their decisions
about whether to provide financial
suppo_rt to new ventures.
Figure 7.9
Often, We Do Not Have Full
Understanding of the Factars
That lnfluence Our Decisions
Basic research in cognitive science
indicates that in many cases, we
are not fully aware of alt the
factors that influence our decisions,
or the relative importance of these
factors. Take, for examp/e, the
young woman in this cartoon. We
doubt that fmancial issues were
real/y the ones that /ed to her
decision.
How VCs Actually Evatuate Business
Plans: ldentifying the Key Factars
Earlier, we noted that a large body of research points to the conclusion that in
making their decisions about whether to offer financial support to nevl' ventures,
VCs and other investors are most influenced by the following factors: (1) the
founding team's capabilities, (2) the attractiveness of the product or service,
(3} potential markets and existing or potential competitors, and (4) potential
returns if the venture is successful. This Information suggests that in preparing
their business plans, entrepreneurs should devotecareful attention to providing
information on these issues. But as you can readily see, even more specific
information on how VC's make their decisions would be more valuable to
entrepreneurs as they prepare a business plan. For instance, what aspects of a
founding team's capabilities are most important to VCs? What factors cause
them to view a product or service as attractive or a potential market as affering
good possibilitiesfor financial retums? In other words, what factors do VCs and
other investors weigh most heavily in making their decisions about new
ventures? Obviously, this kind of infom1ation could guide entrepreneurs
seeking financial support frorn investors. Research on this basic question has
yielded some surprising results. In fact, the factors involved are not always the
ones you might expect. For instance, as we saw in Chapter 5, VC's often tend to
give an irnportant "edge" to entrepreneurs who are similar to themselves in
various ways-background, training, professional experience.
10
But many other
factors, too, enter the picture, so we need ways of identifying these.
One way to answer this question, of course, is to simply ask VCs and other
investors to describe the criteria they use in evaluating business plans and new
ventures. On the face of it, this is a reasonable way to proceed. In fact, though, there
is a basic problern with this approach. Research in the field of cognitive science
confimlS what you may already know from your own experience: In general, we
are not very good at recognizing or describing the factors that influence our
decisions-especially complex ones-or at estimating the relative importance of
each of these factors.
11
(See Figure 7.9 for a
humoraus illustration of this basic fact.)
This leaves us facing an intriguing puzzle:
Tw dom tlx IUI111bm, and I will many you."
Is there any way to obtain a better answer to
this question-to draw a bead on how VC's
and other investors actually make their
decisions? Fortunately, there is. A method of
research known as policy capturing can often
shed light on the question, "What factors
influence certain kinds of dccisions?" without
asking the persans making these decisions to
teil us what they are thinking or what, in their
opinion, they are doing. The method works
like this. First, factors that are believed to play
a role in the decisions being studied are
identified. Next, these factors are built into
various cases or examples in a systematic
manner, and these cases are given to VCs,
who are asked to rate the chance of success of
each new venture described in the cases. For
instance, suppose one factor believed to affect
VCs' decisions is market familiarity-the
extent to which founding tearn members
Source: The New Yorker, January 1 0, 2000.
have experience in this market. The experience
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C HA PT ER 7 Writing an Effective Business Plan: Building a Roadmap to Success '223
of the founding team would be described as high in .
some cases but as low in others. A second factor might be
the number of direct competitors that exist. Again, the
VCs might describe the number of competitors as high in
some cases but not in others. By combining several
factors believed to affect VCs' decisions, many cases or
examples could be generated-examples in which the
key factors are varied systematically (i.e., they arehigh in
some cases, but low in others). By assessing VCs' ratings
of the companies in these examples, information on
which factors actually affect their decisions could then be
obtained. For instance, if, across many different exam-
ples, VCs rate companies in which the founding teams
have a lot of market experience more highly than
companies in which the founding teams have little
market experience, that would suggest that this factor
does affect the VCs' decisions. Moreaver-and this is a
key point-we would reach this conclusion even if the
VCs themselves did not identify this factor as important.
Procedures like these have been used in many recent
studies
12
and together, the findings obtained help to
identify the factors that actually do play a key role in
VCs' decisions. What are these factors? They include
familiarity with the market, leadership ability of the
founding team, proprietary protection (level of protection
providedcbecause the product or service or the process
used to deliver the product or service is unique and
Source: Based on findings reported by Zacharals & Meyer, 2000, see
note 4; Shepherd, Zacharakis, & Baron, 2003, see note 12; and Zacharakis
& Shepherd, 2001, see note 6.)
difficult to imitate), market growth (percentage growth over last several years),
the Ievel of past start-up experience of the new venture team (the number of
other companies they have started in the past), and the number of competitors
and their relative strength assessed in terms of their market share (see Figure
7.10 for a summary).
In sum, although VCs can't always identify the factors listed above as
crucial, these are the ones that seem to play a key role in their decisions about
funding or not fund.ing new ventures. The message for entrepreneurs in these
findings, of course, is clear: Since these are the factors that strongly influence
investors' decisions, information on them should definitely be included in the
new venture's business plan-especially if such information can put it in a
positive light. (What about the quality of a new venture's business plan-is it, too,
an important factor considered by VCs? And more generally, does the quality of a
new venture' s businessplan predict its ultimate success? For information on this
importeint issue, please see the Qualifying Common Sense section.)
Figure "?.10
What Factars Actually lnfluence
VCs' Decisions?
Research employing po/icy capturing
methods indicates that the factors
shown here are the ones that
actuaf/y influence VC's decisions-
even if the VC's themse/ves aren't
aware of their impact.
learning
objective
7
Explain why the quality of
a new venture's business
plan is not always a good
predictor of the new
venture's future success.
t2,uaitjvtliff' etJ7iVfitJn ~ e n } e : mat we ntnk We
Know a.!Jout ~ 'VtMIJ.U'v -and 711'h-at we k?e Do Know
uausiness plans don't really maffer
much-they aren't strongly related to a
new venture's later success."
Since we are discussing the factors that play a
role in VCs' decisions about new ventures, and
since this entire chapter is focused on business
plans, we should address yet another important
question: Does the quality of a new venture's
business plan predict its ultimate success?
Common sense suggests a somewhat surpris-
ing answer: No! Entrepreneurship is all about
"Doing lt," not planning. And because the
environment new ventures face changes so
rapidly, detailed plans such as those included in
224 Assembling the Resources
a business plan don't really predict how weil it
will actually do-situations change too quickly for
the plans to do much good. Same research
findings-although ones we view as far from
conclusive-offer support for this view. They
suggest that business plans, and other aspects
of business planning, are not very helpful to
entrepreneurs and their new ventures.
13
lf this is
really true, then the fact that learning to write
good business plans is stressed heavily in
entrepreneurship education would be called into
doubt-and so would the fact that many Schools
of Business or Management hold business plan
competitions, in which the winners receive cash
prizes and often pledges of financial support
from VCs, angel investors, and others. ln fact,
though, the idea that business planning doesn't
really matter is, we believe, not correct.
First, from a practical perspective, it is
apparent that clearly written, persuasive busi-
ness plans are an essential "entry card" where
many VCs are concerned; they won't Iook
closely at a new venture that doesn't submit a
strong and carefully prepared plan.
Second, and even more important, carefully
conducted research indicates that business
planning, if done carefully and weil, is quite
helpful to entrepreneurs and is indeed strongly
related to their success.
14
ln particular, it has
been found that business planning, which can
be defined as efforts by entrepreneurs to gather
information about a business opportunity and to
specify how that information will be used to
create a new organization that will exploit the
opportunity, helps entrepreneurs to make deci-
sions, balance resources against demand, and
to convert their abstract goals into concrete
steps rieeded to found and run the new venture.
Further, research also indicates that effective
business planning is related to new venture
survival.
15
Overall, then, it seems clear that effective
business planning-and the excellent business
plans to which it can lead-is indeed an impor-
tant and useful activity for entrepreneurs. lt does
not imply, however, that writing a business plan
is without some drawbacks. For instance
16
in
some cases, the pressure to write a lengthy and
detailed business plan may Iead entrepreneurs
to "jump the gun" and choose an opportunity
before they have considered other options that
may, in fact; offer greater potential. ln other
words, they feel so much pressure to write the
plan, that they do so before considering poten-
tial opportunities carefully.
Second, writing a business plan is a time-
consuming activity, and in some cases, it can
divert entrepreneurs from other tasks that might
ultimately prove more beneficial. For instance, it
may reduce the time they have for early market
research, for assessing current or potential
competition, and even for networking. T o the
extent these factors apply, then, the pressure to
write a detailed business plan-which is often
intense-may actually reduce rather than
increase the new venture's chances of
success.
Despite such potential problems, the bot-
tom line seems clear: The effects of engaging in
careful business planning are indeed positive.
Writing an excellent business plan can help
entrepreneurs sharpen their business model and
more fully understand the potential problems
and challenges they will face as they proceed.
Further, a well-prepared business plan-and the
careful planning it reflects-can help entrepre-
neurs understand just what they need in terms
of financial and human resources; and that, in
turn, can point the way toward strategies for
obtaining these needed resources.
Overall, then, we believe that the current
emphasis on writing business plans in entre-
preneurship education is weil justified. T o the
extent it encourages budding entrepreneurs to
engage in careful business planning, a written
plan is an important "plus." However, like
everything eise entrepreneurs do, it must be part
of an overall "balancing act." Entrepreneurs
must avoid the trap of spending so much time
on their business plans that they have little time
for other important tasks. Further, they must
avoid working so hard on this task and investing
so much time in it that their motivation to
continue and launch a new company is actually
reduced. As long as these dangers are mini-
mized, writing an excellent business plan is a
good way for entrepreneurs to begin the
process of converting their ideas, dreams, and
vision into reality, and a helpful strategy for
increasing the ch.ances that the new ventures
they create will be successful.
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C HA PT ER 7 Writing an Effective Business Plan: Building a Roadmap to Success 225
Making an Effective Business Plan
Presentation: The Ball ls Definitely
in Your Court
who study stress agree that the way in which people think about
stressful"situations is a powerful determinant of how they react to them. One
possible reaction is to emphasize the downside-to imagine what will happen
if they simply can't cope with the stressful situation. Many people feel this way
about making formal presentations: They imagine forgetting what they planned
to say or harsh rejection from the audience, and these thoughts cause them to
experience high levels of anxiety, which can in turn interfere with their actual
perfonnance. In contrast, another way to think about high-stress situations is to
view them as a challenge-an opportunity to rise to the occasion and show the
world what you've got (see Figure 7.11). When people think about stressful
situations in this way, they experience lower levels of anxiety and their
perfonnance often matches their expectations: It does rise to new heightsY
Figure 7.11 Contrasting Approaches to Making a Business Plan Presentation
learning
objective
8
Describe the steps
entrepreneurs should
take to make their
verbal presentations to
potential investors truly
excellent.
Making a business plan presentation is an important activity, and as shown here, it can be perceived in two different ways: {1) as a
threatening situation in which one can fail badly, an attitude that can actually interfere with performance; or {2} as an opportunity to
exce/, which can actua/ly enhance performance. Clearly, we recommend the /atter approach for entrepreneurs.
"
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226 PART 1 Assembling the Resources
This is how entrepreneurs should think about making a verbal presen-
. tation of their idea and company to venture capitalists or other potential
iri.vestors or sources oHunding. The fact that they have been invited to make
the presentation indicates that they have successfully passed the first major
hurdle: More than 90 percent of plans do not generate an invitation to make a
presentation, so they are already in a select group. And because they did such
a good job in preparing their plan, why should they doubt their ability to make a
d}rnamite presentation? Basically, they should not; on the contrary, confidence,
not doubt, should be the guiding principle. But confi.dence does not automatically
translate into a first-rate presentation. Giving a quality presentation, like writing
an excellent business plan, requires a Iot of preparation. Yes, some people are
betterat making presentations-and at perstiasion-than others, but almost
everyone can improve their presentation skills if they try. So here are some
concrete steps you can take (we really mean should take) to assure that your
verbal presentation will match the high quality of your business plan-or even
exceed it.
rt Remember: This part really is important. Your carefully prepared
businessplan has gotten you in the door. But venture capitalists, bankers,
and business angels do not give funds to business plans-they give them
to people. So how you handle this presentation has real and serious
consequences for your company. It's important to keep this fact in mind
because it will motivate you strongly to take the additional steps
described next.
;o;;, Prepare, prepare, and then prepare some more. You are certainly the
world's greatest expert on your idea and yout company, but your
expertise doesn't mean that you will be able to describe them accurately,
succinctly, and eloquently without careful preparation. So find out how
much time you will have for your remarks (often it is 20 minutes or less,
and it can be as short as 5 minutes in some settings) and then prepare your
comments to fit this time.
~ Choose the content carefully. What, exactly, should you try to accomplish
during this brief presentation? Several things, but first and foremost you
want to demonstrate that your product or service is indeed something
unique and potentially valuable, and that you understand precisely what this
value is. One of us (Baron) had direct experience with this fact when he
made a presentation that resulted in his own company obtaining a
corporate partner. At this meeting, the CEO of a large manufacturer
(Holmes Products, Inc.) turned to Prof. Baron and said: "OK, Professor,
teil us what you've got." His team of engineers had already carefully
tested prototypes of the product (a special kind of air cleaner), and his s.taff
had read the business plan for Prof. Baron's company carefully, but he
wanted to hear Prof. Baron, as the inventor of the product and CEO of the
company, summarize the nature and benefi.ts of the product. Why? Partly,
to find out whether he really understood them hirnself arid also, as the
CEO of Holmes Products later indicated, to see how Prof. Baron
performed under pressure. Fortunately, Prof. Baron had done his
homework and was ready with a short presentation that got right to the
point, so although many tough questions followed, he feit from the start
that he was on the right track.
:6 Remernher that you are trying to persuade, not overwhelm. One potential
trap for many entrepreneurs-especially ones with a technical back-
ground-is to Japse quickly into technical language that only others in
their field can understand. This approach can be a serious tactical error,
because even though the people the entrepreneurs are addressing are
highly intelligent and have a wide range of business experience, they may
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C HA? TE R 7 Writing an Effective Business Plan: Building a Roadmap to Success 227
not have the specific training needed to understand highly technical
descriptions. In generat it is far better to focus on the big picture---what
the product does and why it is superior to competing products, rather than
to slip into teclmical language that is easy and comfortable for the
entrepreneur, but which may be largely unfamiliar to at least some
potential investors.
11 Show enthusiasm, but temper it with reality checks. As we've remarked
at several points in this book, enthusiasm does indeed sell, so up to a
point, it is a good thing. But it' s also important to temper enthusiasm and
to back it up with hard facts and data. If marketing research has been
completed, it should be described in the context of the new venture's
market strategy. And be sure that any financial projections mentioned
keep at least one foot on the ground; anyone can use a spreadsheet
program to demonstrate sales that soon exceed the entire gross national
product. So, VCs and other investors will certainly not be dazzled-or
influenced-by numbers that make little or no business sense.
II! Rehearse! There is no substitute for rehearsal where oral presentations
are concemed. Some of these practice sessions should be in front of
friends and cofounders of the new venture so that they can provide
feedback on how to improve. Others should be in front of people totally
unfamiliar with the idea or company; they will help indicate whether the
presentation makes sense to people learning about it for the first time.
(Some of the people in the audience will probably be in this situation,
or-a! most-they will have read your two-page executive summary.)
don't even require an audience. It is often helpful to
deliver portians of your presentations in private, to the four walls of your
own room or office, just to make sure that you have committed major
points to memory.
Don't overlook the basics. It's amazing, but we have personally attended
many presentations that feil flat because the people giving them had
focused on the content, delivery, and Ievel of their talks, but had forgotten
about the basics. For instance, we have seen many talks in which the
presenters spent precious time trying to figure out how to get their slides
to appear on the screen or in trying to explain charts or tables that were
too crowded or complex tobe read and understood by the audience. In
other cases, presenters failed to keep track of time and ran out of this
precious commodity before they could make key points. Don't overlook these
basic issues. Doing so can greatly weaken the impact of a presentation.
m Adopt a cooperative, helpful approach to questions. One thing that is
sure to happen during and after a verbal presentation to VCs and other
investors is that rnernbers of the audience will ask pointed, searching
questions. These questions should come as no surprise. First, investors
are being asked to provide money-perhaps large amounts of money.
Second, they are an experienced group who have seenlots of things go
wrang with what seemed, at first, to be excellent start-up ventures. So
they are cautious and will have no reservations about asking entrepre-
neurs to hold forth on virtually any point made in a business plan-and
also on issues not considered in the plan. Entrepreneurs' answers to
these questions are important and must make good sense, but so, too, is
their attitude. If entrepreneurs who are presenting bristle with obvious
annoyance when asked a pointed question, this is a sign to potential
investors that the entrepreneurs may be lacking in the kind of emotional
maturity they want to see in founding teams, and may not be a good
bet. So take questions seriously, try to answer them as best as possible,
and maintain a helpful, cooperative attitude no matter how intense the
session becomes.
228 PART 2 Assembling the Resources
To the extent entrepreneurs (and this includes you!) keep these points
firmly in mind, they will increase their chances of making an excellent
presentation. But suppose that despite your best efforts, and despite the fact
that you did an excellent job, you still receive a "no" from a group on which
{
you pinned high hopes. Should you be discouraged? Not at all. Few ~ -
entrepreneurs obtain support from the firstpotential investors they approach.
In fact, highly successful entrepreneurs often note that their companies were
rejected by many investors initially. In view of this fact, rejections should be l-
viewed as an opportunity to leam-a source of valuable information. Try to
find out why the proposal was rejected, and whether there were aspects of the
plan and presentation that the potential investors found especially weak-or ~ -
strong. Then, go back to the drawing boards and rework both the plan and
presentation. Along these lines, there are two key points entrepreneurs should
keep firmly in mind: (1) There is almost always room for improvement, in
virtually everything; and (2) Success does not have to be immediate to be r
sweet. Good luck!
A business plan is a written document
that explains the entrepreneur's basic
business model: how a recognized
upporlur1ily will be converted into a prof-
itable company, and how this company
will operate.
Venture capitalists and other potential
sources of funding generally require a
formal business plan as a first step for
considering investments in new ventures.
, An additional and often important step
involves a face-to-face presentation of
the plan by the entrepreneur to venture
capitalists or other interested parties.
Preparing a formal business plan is useful
for most entrepreneurs because doing
so encourages them to formulate specific
goals and concrete plans for reaching
them, and both are invaluabfe for con-
verting ideas into viable companies and
for raising needed capitaf.
,- Many successful entrepreneurs develop a
fairly simple business plan and then refine
it in light of information they gain from
actually running the new venture.
All business pfans should begin with an
executive summary-a briet (2-3 pages)
section that provides a clear and persua-
sive overview of what the new venture is
all about.
Subsequent sections should include the
following:
Background, Purpose, and Opportu
nity: A description of your idea and the
current state of the business.
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Writing an Effective Business Plan: Building a Roadmap to Success 229
Marketing: A description of the market for the new
venture's product or service, why there is a need for the
product and why anyone would want to buy one, plus
information on existing competition, how it will be
overcome, and pridng. . .
Develpment, Production, and Location: Where
the produtt. service is in terms of development,
how it will be produced, and (if appropriate) infor-
mation on where the business will be 1ocated.
Management: A listing of the experience, skills,
and knowledge of the new venture's management
team.
Financiaf Section: Information about the company's
current financial state, as weil asprojections for future
needs, revenues, other financial measures, and a break-
even analysis.
Risk Factors: A discussion of various risks the new
venture will face, and the steps the management team
is taking to protect against them.
Harvest or Exit: A description of how investors will
gain if the company is successful.
Scheduling and Milestones: An overview of when
each phase of the new venture will be completed, so
that potential investors will know just when key tasks
(e.g., start of production, time to first sales, projected
breakeven point) will be completed.
Appendices: Detailed financial information and
resumes of the top management team.
Asking entrepreneurs what factors influence their
decisions about new ventures seems reasonable, but
unfortunately, they are not very good at identifying the
factors that affect their decisions, especialfy complex
ones.
A research method known as policy capturing helps
resolve this dilemma. lt provides information on the
Breakeven Analysis: An analysis indicating the
level of sales and production required to cover
all costs.
Business Model: A plan describing ho\v a nev,r busi-
ness will actually operate and how it will, poten-
tially, make a profit.
Plan: A detailed written description of the
entrepreneur's vision for converting ideas into a
profitable, going business.
Cash Flow Statement: A formthat forecasts cash flow
over a specific period of time, given certain levels
of projected sales and capital expenditures.
factors that influence VCs' decisions even if the VCs
. themselves aren't aware of these effects.
Research employing policy capturing methods in-
dicates that VCs' decisions are strongly influenced
by several factors, such as the experience of the
founding. team in this market and in starting other
companies, the number of competitors and their
. relativE) a.nd. m(!rket growth in recent years.
. . ,..., ' . ; .
Entrepreneurs should always devote careful attention
to these factors in their business plans.
Overall, writing an excellent business plan has
important benefits. However, because it is a time-
consuming task, it also has drawbacks. As a result,
entrepreneurs must assure that preparing a strong
business plan is just part of the many activities they
perform a:s they move toward launehing a new
venture.
Entrepreneurs should view invitations to give verbal
presentations about their idea and their company as a
challenge-a chance to shine-rather than as a high-
stress situation in which they may be overwhelmed.
Because such presentations are so important to the
future of new ventures, entrepreneurs should take
them seriously and try to do an outstanding job.
Steps that can help entrepreneurs accomplish this
goal include selecting content carefully, avoiding
technical jargon, showing enthusiasm teinpered by
reality, rehearsing carefully, paying careful attention to
basic aspects of presentations (e.g., arriving early to
set up audio-visual systems), and adopting a coop
erative attitude toward questions.
Entrepreneurs should view rejections by potential
investors as an opportunity to learn-to improve both
their business plan and their verbal presentations.
Persuasion: The task of inducing others to share our
views and to see the world much as we do.
Policy Capturing: A research method used to deter-
mine what factors actually affect individuals'
decisions without asking them to identify these
factors.
Proforma Balance Sheet: A form showing projections
of the company's financial condition at various
times in the future.
Proforma lncome Statement: A form illustrating
projected operating results based on profit and
lass.
DO PART 2 Assembling the Resources
1. If writing a business plan requires a Iot of work,
why should entrepreneurs do it? Why not just
get the company started? Which approach would
you prefer, and why?
2. Why is the executive summary at the start of a
business plan so irriportant? What should be its
primary goal or goals?
3. Why it is important to explain just where the
new product or service is with respect to the
production process (e.g., Is it an idea? A proto-
type? In production?)?
4. Why it is so irriportant for a business plan to fully
describe the experience and expertise of the new
venture's management?
Writing a Great Executive Summary
A first-rate executive summary is an important
ingredient in any good business plan. Excellent
summaries catch the attention and interest of poten-
tial investors who generally decide on the basis of the
executive summary whether to continue reading or to
move on to the next plan in their pile. For this reason,
learning how to write an excellent executive summary
is a useful skill for entrepreneurs. Follow these steps
to irriprove your skill with respect to this irriportant
task.
1. Write an executive summary for your new
venture. Be sure that it is no more than 2-3 pages
long.
2. Now, ask several people you know to read it
and comment on it. In particular, ask them to
rate the summary on the following dimensions.
(Ratings should use a 5-point scale: 1 = very
poor; 2 = poor; 3 = neutral; 4 = good; 5 =
excellent)
a. It provides a clear description of the new
product or service.
Describing the New Venture's Management
Team and Putting lt in a Favorable Light
As we noted earlier in this chapter, potential
investors consider the quality of a new venture's
management team to be a crucial factor-perhaps
the most crucial-in their decision about whether to
provide funding for it. Consequently, it is important
not only to assemble an excellent team, but also to
5. How much optii:nism should be included in
financial projections? What is the potential
"dwnside" of making these ptjections too
optimistic?
6. Why should business plans include a full disclo-
~ e and discussion of potential risk factors?Does
this discussion just call attention to "negatives"
that might prevent investors from providing
financial support?
7. Do you think that most people can really learn to
be better at making presentations? Why or why
not?
b. It explains why the new product or service will
be appealing in specific markets.
c. .It identifies these markets and explairis how
the product will be promoted in them.
d. It explains where the product is with respect to
production.
e. It explains who the entrepreneurs are and
describes their background and experience.
f. It describes current or potential competitors,
their strength in existing markets, and how the
new product or service will gain competitive
advantage.
g. It explains how much funding the entrepre-
neurs are seeking and the purposes for which
it will be used.
3. Obtain the average score on each dirriension. The
features on which you scored low (3 or below)
are the ones on which you should work. Prepare
another, improved executive summary and have a
different group of people rate it.
4. Continue the process until the ratings on all
dimensions are 4 or 5.
describe it fully and in terms that are as positive as
possible. Unfortunately, some entrepreneurs don't
seem to recognize the importance of this task. They
fail to list past accomplishments or experience
and are just too modest overall. Carrying out the
following steps can help you avoid these errors
and increase your chances of obtaining the funding
you seek.
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C HA PT ER 7 Writing an Effective Business Plan: Building a Roadmap to Success 231
1. List each member of the founding team of your
new venture.
2. Describe their role in the new venture-what,
specifically, will they do?
3. Next, ask each member to provide information on
these items:
a. Where and when they received their degrees,
and in what fields.
b. A description of all relevant experience- .
experience that is in any way related to the
tasks they will perform-including work expe-
rience, offices held in social and professional
organizations, experience in running previous
businesses (even small, informal ones), writing
experience, and almost anything that is rele-
vant to their role in the new venture.
c. Honors, awards, and prizes they have received
(academic, business, athletics, etc.).
d. Personal references-the more experienced,
well-known, and prestigious, the better.
e. Anything eise in their background or experi-
ence that is relevant to their role in the new
venture and puts them in a favorable light
(e.g., famous relatives? Famous friends or
associates? etc.).
4. Match the information that you have about the
members of the founding team to the roles you
defined. Make sure to include all the information
that supports their ability to fulfill these roles, but
don't include information that isn't relevant to the
role. (For example, don't say that your head of
marketing was the president of her high school
chess club.)
5. Finally, show the finished description that will be
part of the business plan to other members of
founding team and "brainstorm" with them
about whether it presents your strengths in a
way that will be obviolis to potential investors. If
it does not, go back to the drawing board and
start again!
Writing an Effective Business Plan: Building a Roadmap to Success
The Business Plan Archive (www.businessplanarchive.
org) is an online repository for business plans and related
planning documents created by Webmergers.com and the
University of Maryland's Robert H. Smith School of
Business, in cooperation with the Center for History and
New Media at George Mason University and with financial
support from the Altred P. Sloan Foundation. lts aim is to
collocl uw.;irru!:l:.; plwr:; fur poulorily in llro Univuwily'::;
archives to make them accessible to future entrepreneurs
and business researchers. (The site requires a free
registration for access to the documents, which include
business plans, and a variety of other corporate docu-
merlts, from executive summaries, to details of venture
capital funding rounds.}
One of the companies for which the Business Plan
Archive has a business plan is rdental, a dental services
portal site that, by the timeofthat business plan's writing,
had forged an alliance with WebMD and the American
Dental Association.
The company hasn't survived; the documents on the
site and the Iack of much of a "fossil record" for the
company on the Web past 2002 suggest that it may have
failed to land the next $1 0 million in funding it was
seeking to remain one of a shrinking pool of dental-
oriented portal sites.
The business plan for rdental in the Archive is of a
wull-u!:!luuli!:!lretl :.;tarl up, and :.;eems more oriented
toward fund raising (see also a four-page Ietter to
prospective investors, which is even more targeted
toward landing their next funding round} than a guide
for internal consumption. The Ietter, essentially an exec-
utive summary of the business plan, provides a snapshot
of the company's technological and business develop-
ment achievements, position in the market, and its
current and anticipated financials:
The vast majority of rdental's early product
development work is complete and we now
have "visibility" an a number of our streams of
232 f.> ART 2 Assembling the Resources
revenue. While projecting Future revenue growth
is at best an inexact science, we believe that the
broad diversity of our streams of revenue
combined with our exclusive partnerships with
so many top industry players, makes it likely that
we will achieve our goal of being cash flow
positive by the end of 2001 and profitable in
2002.
ln October of 1999, there were no fewer
than 30 dental companies with lnternet-based
business strategies. Today only a handful still
exist, with only two or three having a realistic
chance of surviving, rdental has carved out its
niche in the dental field and will thrive as the
leading dental services company using the
Internet as a means of providing products to
the profession.
ln the business plan, rdental lays out its four major
markets:
a. Continuing Education
Market Size-$360 million (worldwide)
Company Products-Online, Video arid CDRom
lectures
Market Position-Leader based upon exclusive
agreements with top thought Ieaders in dentistry
and the ADA, the Academy of General Dentistry and
the Michigan Dental Society
b. Dental Directory
Market Size-$355 million (US)
Company Product-Digital Dental Directory
Market Position-Only viable online directory due to
exclusive relationship with WebMD, which provides
consumers users
c. X-ray Attachments
Market Size-$97 million (US)
Company Product-Tigerview
Market Position-Leader due to Tigerview's position
as the leading technology as determined by third-
party research
d. Product Showcase
Market Size-$38 million (US)
Company Product-Online Product Showcase in
conjunction with DPR
Market Position-Only viable online showcase due
to exclusive deal with DPR
The company also had plans to launch a new
product, PreceDent, to enter the market for dental
application service provider (ASP) services, a market it
estimated to be on the order of $240 million per year in
the United States alone.
By rdental's business plan accounting, it is looking at
a market on the order of $1.09 billion (more if non-U.S.
markets are added in all categories). A fairly healthy
market to attack-its then-partner WebMD, now a public
company, recorded about $170 million in revenue in
2005. lf rdental made its numbers, and if the analysis was
accurate, the company might be weil on its way to an IPO
itself.
The company's product for X-ray attachments,
Tigerview, was the result of an acquisition, one of the
uses of its previous funding, including $9.4 million from
partner/investor webMD: As of the compilation of this
version of its business plan, the company was growing
through strategic partnerships, technology acquisitions,
and online and off-line marketing.
Another archive, the Internet Archive created by
serial entrepreneur Brewster Kahle, is extremely useful
in "archaeological digs" for the details on once and
former dot-coms: the Archive's "Wayback Machine"
(www.archive.org) allows for searches of what Web
sites used to Iook like. Many companies now long gone
are chronicled in the Archive's repository, and series of
snapshots of sites from aarliest inception, to heady vc-
funded growth, to "This domain for sale" postmortem,
can be found for many.
The Internet Archive tracks rdental's Web site
through 2004, but the site shows no evidence of any
change for the last few years, still sporfing news of its
Tigerview acquisition made in July 2000.
lt's a reasonable guess that rdental met its demise in
the bursting of the dot-com bubble, which took down
many companies, despite credible business plans and
solid past performance.
Questions
1. How might the company's first business plan have
described the four markets that were identified?
2. What do you think would be most valuable in an
archive of business plans for the prospective entre-
preneur? II you were heading up the university's
project, where would you Iook for new acquisitions?
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Writing an Effective Business Plan: Building a Roadmap to Success
233
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2 Meyer, G.D., & Meeks, MM. (2005). TI1e fallacy of business
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3 Chrisman, J.V., McMullan, E., & Hall, J. (2005). TI1e
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