DealHorizon - the faster, easier way to create and share business plans

Several years ago, while I was setting up and building out sales and distribution offices for a satellite company in China, Indonesia and India, I was given a briefing on marketing to these emerging giants of the Asian market by several senior executives from a local (Mumbai-based) ad agency.

Now, you would assume that boiling down the buying habits of three billion people is a difficult task - but these guys managed it with aplomb. Their secret? The cigaratte.

Don't like cigarettes? Think they smell toxic and are generally negative contributors to society when it comes to interpersonal gatherings and world health? So do I. But please read on - because what I learned from this presentation is that not only are cigarettes personally addictive, they have created a retail distribution system that is equalling compelling at every level of the value chain.

Consider the beginnings: when a cigaratte manufacturer ships its cigarattes, a non-perishable good, from America or Europe to Asia, it typically uses containers.

• A container can fit an average of 55,511 cartons of cigarettes
• A case typically fits 60 cartons of cigarettes
• A carton of cigarettes contains 10 packets of cigarettes
• A pack of cigarettes contains on average 20 cigarettes

So at one end, you have multiple containers packed with roughly a million bucks worth of cigarettes (55,511 x $20 (avg retail) = $1,110,220) each. They arrive, and the individual cases are then shipped off to subdistributors, who then split the cases into the first retail expression of the cigarette: the carton. The cartons are then further split into packs of cigarettes by the retailer, vending machine operator, etc.

At this point, however, the story goes an additional step further. While the retail chain typically stops at the point of the packet in the First World, in many countries, the retail chain goes much further - to the level of the single cigarette.

Cigarettes are sold individually at stop lights, small shops, movie theaters, bars, on the beach, to the people who cannot afford a pack, but can afford perhaps one to three cigarettes on an individual basis, and are willing to provide the middleman with a slight mark-up for that convenience.

Herein lies the genius of the cigarette distributors: they have come up with a hugely scalebale model. At the other end of the distribution chain is a massive container ship - at the other is a small retail village store, or teenage vendor weaving in and out of traffic, selling a cigarette.

Almost every entrepreneur knows the "give away the razor, sell the blades" marketing strategy that King Camp Gillette pioneered, but Gillette had some other innovative ideas that have received rather less attention over the years - but may be coming back into vogue.

First, the epiphany. Prior to turning inventor/entrepreneur, Gillette grew up poor after his family's holdings were wiped out by the Great Chicago Fire of 1871.

He moved west and eventually scored a job working as a saleman for Crown Holdings (still around today, but then called the "Crown Cork and Seal Company"), a corporation that sold bottle caps designed to protect the fizziness of newly-invented carbonated drinks.

One day on the job, he noticed that the buyers of these carbonated beverages simply tossed the products he was selling - Crown's cork-lined bottlecaps - onto the ground. The epiphany? People could be convinced to buy something useful, and then throw it away. Thus was born the idea for the disposable product.

Contrary to popular myth, Gillette did not invent the safety razor - that was thought up nearly thirty years prior to the forming of his company - but his did invent the idea of building a profitable business based on the idea of subsidizing the user's investment in the platform (the razor) in order to profit from the sale of a mass-produced plug-in (cheap blades).

His first year wasn't stellar - his books showed sales of just 168 blades in year one - but in year two, sales increased to over 90,000 blades, and by year seven, he was selling 70 million blades a year. Few business plans have ever succeeded so spectacularly.

The rest of the story? Gillette, like many entrepreneurs, was possessed with some ideas that proved, well, slightly less successful than his disposable razor. This, from wikipedia:

Gillette was a Utopian Socialist. He published a book titled The Human Drift (1894), which advocated that all industry should be taken over by a single corporation owned by the public, and that everyone in the US should live in a giant city called Metropolis powered by Niagara Falls*.

According to his obiturary, published in 1932 by the New York Times, despite becoming a multi-millionaire, King Gillette remained committed to his socialist ideals for the rest of his business life. He published a Prospectus for Metropolis in 1910 and offered President Theodore Roosevelt the job of CEO with a starting salary of a million dollars a year - in 1910 dollars. According to the Times, the President turned him down.

*Some would argue that we're heading down that road right now in the US - but with a less-costly chief executive (the current salary of a US President is just $569,000, including expenses - the sum offered Teddy Roosevelt is equivalent to $22,738,815 today - you can check my math using The Inflation Calculator.)

Tonight, I'm here to talk about the damage that self-gratification can inflict upon companies, and their customers and shareholders - but also to talk about how some entrepreneurs manage to succeed, despite some potentially damaging flaws.

Let's start by agreeing a few very obvious things:

• All entrepreneurs require start-up capital at some point
• Given the extremely low chances of success, entrepreneurs must hire the very best people
• Entrepreneurs need to create products or services that satisfy the needs of others
• Entrepreneurs need to create pricing and support structures that provide a high perceived value and reduce the risk of purchase
• Entrepreneurs must keep the company moving behind a consistent vision
• Due to the typically high cost of acquiring a customer, which often must be amortized over years, entrepreneurs must retain the customer as long as possible
• Due to the typically high cost of acquiring a new key employee, entrepreneurs must retain their key employees as long as possible
• At the right time, the entrepreneur must sell the company, so the shareholders can receive a return on their investment

Thus agreed, it stands to reason that the following must be true:

• Entrepreneurs that cannot engage with investors will not succeed
• Entrepreneurs that hire on the basis of looks and social skills only will not succeed
• Entrepreneurs that create products that do not satisfy the needs of others will not succeed
• Entrepreneurs that cannot agree price and support conditions with a customer will not succeed
• Entrepreneurs that change direction every fifteen minutes will not succeed
• Entrepreneurs that refuse to maintain a customer relationship over time will not succeed
• Entrepreneurs that fail to reward and retain their best employees will not succeed
• Entrepreneurs that refuse to sell their company at any price will not succeed

And sure enough, we only need scan our memory banks for mere seconds and we can each think of an entrepreneur (or perhaps several) who failed because their interests did not extend to tasks such as doing the legal footwork, bringing in investors, closing deals, coming up with attractive products, pricing structures and customer support plans.

Some of these guys do everything wrong - they treat engagement with people as chore (or a prayer session, with themsleves in the middle of the circle), act like usablity and pricing studies are personally insulting to them, spend company money on self-promotion rather than company promotion, and invite their college buddies, rather than their customers, out onto the golf course.

But some inwardly-focused individuals also create enormous value, either because they succeed in solving a problem for themselves which creates a solution that can then be extended to others, or because they have an intense personal curiosity in an object or idea that has not yet caught the attention of others.

The question is, how can someone who is horrible at engaging with investors, employees and customers, self-possessed beyond belief when it comes to product design, and utterly disinterested in legal agreements, pricing discussions, service level agreements, and the sale of their company, succeed?

Or, put more simply, how can you, the entrepreneur, ensure that the financial impact of your weaknesses doesn't overwhelm the financial impact of your strengths?

How?

Years of studying the significant flaws of myself and others in this area have yielded an observation - there is indeed a proven way that an entrepreneur overly-focused on his own needs or thoughts can succeed:

Hire an experienced, customer-focused, make-sure-the-trains-run-on-time type individual that understands how to turn your rare moments of genius into success, using capital, teamwork, data-gathering, product design and testing, the media, customers, distributors, and the public markets.

Yes, if you can find the right person, it really is that simple. VC's have been doing this systematically for years - hiring the guy I just described. The trick for the entrepreneur placed in this situation is to assist in the process so that a person is found with the capacity to be be respectful of the entrepreneur's gifts and flaws, and also capable of turning the fruits of that curiosity into a successful business.

Whatever you do, if you're an entrepreneur and some of this stuff is ringing bells as a potential problem, stop now. Get help. Don't refuse to deal with your flaws. You know what the result of that will be - it's in the title of this blog.

There are three things they say you should never watch being made: sausages, your siblings, and web sites. Having just completed a two month re-work of DealHorizon, we can concur. But, that said, the task of improving one's web site is getting easier - thanks in part to terrific tools like Google Website Optimizer.

During the rework of this site, we used Google's Website Optimizer a lot - and the results were incredibly useful. GWO works by offering up different versions of web pages to users, and looking at where the users go next.

One of the tests we tried resulted in a 450% difference between the original and the variation (test) page - yes, that's right: more than 4x the number of people clicked through to the new page. It turns out, the original page had a horrible bounce rate that we were unaware of. The new variation showed a huge improvement in the number of folks clicking through to the next page of the tool.

How much was changed between the two pages? Here's the kicker: One image. That's it. That's all that was needed to create a 450% improvement. That, and the ability to track our progress.

If you're a ventue capital provider and you recently invested in a company that does a large amount of its sales online, ask them if they're using GWO, and if they're not, what they *are* using to test different versions of the web site.

Between Pingdom.com and GWO, there is a lot a company to do to inform itself about the customer experience, and improve it. And these two tools just touch the surface of what's available - there are numerous other tools that can provide huge benefits, including a fast-growing brand optimization start-up that I'm an investor in called Heardable.com which provides a holistic overview of how well your brand is positioned online.

Given the stuff that these tools are capable of, it won't be long before we can take "web sites" off the list of things we don't want to watch being created. Which will just leave "your siblings" and "sausages" to deal with...

Many years ago, we tried to get funding from US investors for a start-up based outside the US. Big mistake! Our investors weren't interested in investing in an offshore-based company, and almost walked. We quickly moved the company to Delaware, a state that offers considerable advantages to startups that incorporate there, and closed our deal.

We proved that we were quick learners. Unfortunately, that isn't always the case.

A few months ago, I was forty minutes into hearing the best pitch I'd heard in a long time when the entrepreneur - a financial services guru - dropped a bombshell. They had no intention of creating a corporation around their idea, he said, and would be instead be structuring the company as an offshore partnership "for tax reasons."

What followed was a prolonged silence, followed by several "beeps" as potential investors on the call dropped off the line, leaving only their unasked questions: A partnership? Tax reasons? Do you guys have any idea how venture capital works?

Trying to sell tax minimization to a bunch of guys sitting on ten year fund structures wasn't actually the dumb part - the dumb part was, when you propose a non-standard financing structure, it can become impossible for venture investors to hedge their capital in the usual ways, i.e. by using liquidation preferences, dividends, redemption rights, additional warrants against milestones - or management incentive plans.

These days, liquidation preferences are fairly standard (a "liquidation preference" is an agreement between the VC and the entrepreneur that the VC will take the first bite of cash when the company is sold, multiplied by an agreed multiple, before anyone else gets their share or otherwise "participates".) Likewise, terms such as redemption rights (which allow the VC to force the company to buy back their shares after an agreed period of time, commonly three to five years) are common to many VC investments.

I politely suggested to the folks on the call that they speak to a lawyer, but they said they already had. Turns out the guy was a tax minimization expert who'd never done a VC deal in his life - and was attempting, through these guys, to change the system based on what he thought were good ideas.

Bad idea. Unless you're personally investing in a new incubator or VC fund, or you're Google and you're about to have a riskless IPO, your goal should not be to change how venture capital works, or incorporation documents are written.

Using the standard legal documents and approaches creates numerous legal benefits based on literally decades of case law and is financially the most cash-efficient approach (the last company I incorporated in Delaware cost $129 to incorporate and the incorporation took less than a day).

So, here's my non-legal, practical advice: if you're thinking at some point you may raise money from venture capital providers - and especially before you choose a single proprietorship or partnership structure for your business, talk to a lawyer who has done venture deals before.

They will possibly/probably steer you towards a "C Corp" structure, a structure which allows entrepreneurs to issue multiple classes of stock. You and your team will be issued the "common shares", and the VCs will ask you to create a class of "preferered shares".

Note: These preferred shares often pay interest and are typically redeemable after a period of time (not easy to structure those into a partnership). Preferred share issuances are usually named after the letters of the alphabet, as in "Series A" for the first lot issued, "Series B" for the next, and so on, until the company either goes bust, goes public, or otherwise has no additional need for capital.

Tip: If you need a lawyer to help you create your initial documents and corporation, the firm I usually use for this initial work (I use a different firm for later-stage stuff) is Amini, Levin and Fey, based in Los Angeles, phone number +1 818 382 3800. Nice people. Ask for Emily Levin.

As many of you know, I'm involved in several financial services start-ups (you're looking at one of them). And the thing that is most noticeably different about these startups versus other startups I get to see is the superb quality of the financial models and resulting business plans.

Budgeting and financial planning are typically not the strong points of startups - especially those startups comprised of non-financial services technology developers. Too often, the financial model is treated as a necessary evil - an "after-thought" in the venture capital procurement process. On many occassions, it is created backwards - i.e. from an acceptable exit value, or target gross margin, back to present day.

The result is often pretty bad - a buggy model filled with poorly-anticipated (or missing) costs and a lot of sales and net profit numbers leading sharply up and to the right, on into infinity.

But let's not 'tut-tut' and point fingers - the reason for the haste is easy to understand. Though this may be hard for die-hard Excel Jockeys to comprehend, technologists would usually much prefer to be typing curly brackets or holding test-tubes up to the light than creating financial statements (in fact, many of them would choose a poke in the eye with a toothpick over a day working with Excel!)

So how do we improve the quality of the plans that are created and presented, and inject some sanity and checks and balances into the planning process? The first step is to rank the characteristics of the "rapid business plan creation" approach and look for any obvious strengths, by asking:

1. Who prepared the plan?
   
   1. a professional (e.g. CFO/banker)
   2. a non-professional (i.e. technologist)
2. How was the plan prepared?
   
   1. using an business plan template
   2. from scratch
3. Who informed the assumptions?
   
   1. the whole team
   2. only the person writing the plan
4. Does the balance sheet add up?
   
   1. yes
   2. no
5. Does the plan include a cash flow calculated on the basis of changes in working capital?
   
   1. yes
   2. no
6. Do the assumptions include monthly growth of costs in line with sales?
   
   1. yes
   2. no
7. Do the assumptions include a mechanism to "throttle" revenue growth on the basis of an increase in competition, or a decrease in the number of potential customers?
   
   1. yes
   2. no
8. Do the assumptions include a mechanism for handling operating cost increases, either on a target cost-per-employee basis, or revenue per employee?
   
   1. yes
   2. no

If the answer is "A" to these questions, for all quesions, then it's possible the plan reflects a mature approach to planning that is financially sound, correctly timing the costs, allowing for competitive pressures and other mature-stage product cycle pressures, and outputing believable margins.

If the answer is "B", to the above, it's time for either a punt - or a rethink.

One possible approach is to use some of the excellent businesss planning software packages that are out there. On the plus side, they are likely to be significantly less buggy than in-house "from-scratch" financial models, and output professional-looking statements.

However, the drawback to almost all of those offerings is they are typically not web-based and cross-platform, not collaborative, don't allow uploading and sharing of documents, and often require a knowledge of arcane accounting terms.

Another approach is to try the collaborative business planning platform we're building here at DealHorizon. It is truly collaborative - any member of the team can create, access and save plans, and you can easily revert back to different, previous (or future) versions if needed.

Plus, it's dollar-perfect - and contains many of the recommendations we pointed out above, including basic anti-hockeystick/product growth attentuation mechanisms. If you need to work last-minute, this approach should get you most the way to a professional-looking, "8A's" set of financials.

If you lined up most entrepreneurs and asked them what the most essential component of success is, they'd probably answer "a killer product". But from my observations (many of which have involved "killer products"), the single most important factor in a product's success is that product's pricing strategy.

Your pricing strategy determines not only your ability to earn revenue and generate profit, but also your position in the market. And that's not all - if you're selling via the Internet, pricing determines everything from the potential breadth, strength and energy-level of your distributor network, to your ability to provide customer support.

I recently met with a number of distributors to try and determine the best price for a product I'm launching at one of my start-ups. Here's what I learned:

• Marketing affiliates price their offering space by a simple formula
• That formula is: retail price * commission percentage * conversions to sale
• E.g. $100 x 30% x 3 sales a day = $90

I'll let you do the math (you can use the DealHorizon Sales Projections Calculator to run the numbers) - but what I think you'll find is

• Commission percentages are now fairly standard
• Conversions depend in large part of the nature of the audience in front of the offer
• The most important component of the calculation, by far, is price

The reason for this is probably obvious to you - when it comes to signing up an affiliate, that affiliate already has a pretty good idea of their audience and the kind of offers that work. They already have experience in asking for (and getting) commissions that are market-rate. Finally, they know exactly what their offering space (the real estate on their site dedicated to the sale of third party product) is worth.

Let's jump to the conclusion: if your price is much less than the pricing of a product of comparable quality with comparable features that appeals to their audience, guess what? You're out of luck. They will pick the comparable product every time.

You will have no choce then but to watch as sales of your competitor's products rise (along with positive reseller buzz). Before you know it, you're off the reseller radar, behind the eight-ball, and (woe of woes) selling direct to consumer without the support of a marketing network.

So let's talk hard numbers - what makes a good price for a product to be sold on the Internet? My view is that you should not sell anything on the Internet for less than an absolute minimum of $100 per year. Assuming a 25% commission (you do the marketing) to 50% (they do the marketing) kick-back, that leaves you with $50 (worst-case) to fund your operations, including customer support.

Product not worth $100? Consider creation of a premium offering, or if that can't be done, buying in third party products to bundle with your offering and bolster the value - so you can get your price up to a level (preferably $150+) where it becomes very hard for a potential distributor to say "no."

The bottom line: most distributors will not touch a product or service that retails for less than "x" amount - and "x" more often than not is $100 per sale. Ignore this advice at your peril.

Whatever you do, don't base your pricing on "gut feel" or single data points. When I priced my best-selling "Heart of Asia" CD-ROM back in the mid-nineties, I set the sale price at US$595 in a market in which most other sets were selling for $99. My thinking was, this price will establish a sense of value and quality, and the people that own post-production studios will make back this investment in two to three sessions.

I was right - and signed up some tremendous distributors, who sold the product for me for the next ten years - like hot cakes. Some nice reviews and quality samples helped - but our premium pricing strategy - 5x the competition - was key to creating a highly profitable product.

Today, we are launching a new tool that we think some entrepreneurs might find useful.

It enables entrepreneurs to create a five year business plan based on the answers to just a few questions. The time needed to reach a rough draft five year financial plan and Executive Summary is just a few minutes.

One of the potentially most powerful components of the tool is the five year financial plan wizard. Now I don't know about you, but in my early days as a struggling entrepreneur, creating financial projections and operating budgets was a huge challenge for a small team - and often took several weeks or even months.

This tool enables you to examine the fundamental financial strength of your business idea - andthe amount of capital you need to raise -after just a few minutes. The key outputs include:

• Sales Projections (five year)
• Operating Budget (monthly)
• Income Statement (five year)
• Balance Sheet (five year)
• Use of Funds Statement (five year)
• Cash Flow Statement (five year)
• Executive Summary
• Draft Business Plan

In addition to creating PDFs of the Business Plan, Financials and Executive Summary, you can upload attachments - there is a data room attached to each project. The data room enables uploading and sharing of documents, such as spreadsheets or sales materials, or slide decks. It is possible to collaborate online with your team members, save different drafts of the same plan, and share messages.

Right now, the tool uses a single web-based business template that enables you to easily see the effects of different pricing. As we move through the beta, we'll be adding more templates to the engine to better account for different business models, and incorporating your feedback as we go.

To launch the Business Plan Generator, you (and any team members) just need to sign up(very simple - takes just 12 seconds on average), then select "Add Company" from the menu. The steps are pretty clear from there - just select "Create Business Plan".

Our goal is create a highly-efficient system that enables entrepreneurs to present a polished set of financials to potential investors - and we'd like you to please let us know if you think we're on a path to achieving that, or what we still need to do to make this happen.

Please give this tool a try and let us know your feedback.

As an entrepreneur, your job is not to just dream up a new technology, product, service, or solution, but to build a business around the people that find your invention valuable.

For this to happen, you need to roll up your sleeves and build a tangible expression of your idea - i.e. a working prototype that people can experience - then come up with a plan that will allow you to add the essential things required to build and maintain a business - branding, infrastructure, staff, a support team, a product and technology development team, marketing and distribution channels - and capital.

With very few exceptions, investors cannot afford to get excited about an idea. The real rarities in this business are ideas bundled with achievable execution plans and good solid people.

Need an example of the dearth of successful business expressions versus the number of ideas? When you live in Hollywood, as I did in the early nineties, you quickly get a grasp on the economics of not only movie-making, but the "idea-factory" that provides Hollywood with its raw material - movie screenplays. Here's what that looks like today:

• Population: 12,872,000 (2009 metro area)
• People over 15: 10,297,600 (CIA Fact Book USA)
• % with a "great idea for a movie": 100% (my estimate)
• New screenplays registered each year : 100,000 (filmandmoviemaking.com)
• Movies produced each year (majors and independents): 669 (the-numbers.com - great site BTW)
• Number of profitable movies: <100 (based on average budget/gross)

Yeah, I know - the estimated total number of folks with "ideas for screenplays" may be a tad high, but in the five years I lived in Hollywood, I'm not sure I met *anyone* aged over 15 who *didn't* harbor a great idea for a movie - or television series, best-selling novel, videogame, etc.

But even if you cut out the general population of dreamers and use just those who have actually committed their idea on paper (and registered it with, say, the WGA), the ratio of idea to "profitable product" is still roughly 0.10% - just a tenth of one percent.

Still think your "idea" is worth something?

Ask anyone who has introduced themselves as some kind of broker to execution (agent, producer, venture capitalist, banker) how many people have pitched them an idea - as opposed to a concrete script or agent-produced package - and they'll roll their eyes. These guys hear ideas so often, some of them disguise what they do in order to better enjoy dinner parties.

Which brings me to my point: ideas for movies, inventions, businesses, and other novelties are so plentiful as to be almost valueless. The thing that matters is not the idea, but the concrete expression of it - or in the case of a patent application, a well-thought-out description that passes muster with the USPTO.

We talked about this in a recent DealHorizon article entitled 30 Tips for Writing a Business Plan and Raising Venture Capital - and included one of my favorite stories about doing versus thinking about doing:

Add perspiration - The French mathematician Henri Poincare was once famously quoted as saying "the creative process moves through three stages - saturation, incubation, inspiration". Albert Einstein later quipped that Poincare had forgotten the fourth, most important stage - "perspiration". We think this story may provide a clue as to why "Einstein" is, today, a household name...

How many years have you been dreaming of starting a business, producing that new engine, writing that book, improving that technology? Stop it - now. Stop dreaming and start doing. Yes, it's harder work - but much more rewarding. Trust me - the people you meet will be much more interested in what you're doing than listening to you talk about your idea.

They may even give you their real phone number.

The co-founder of a business I'm involved in and I were on Skype just now, worrying out loud about how much programming work we still have to do on one of our projects to be able to present our planned architecture to end users.

You know the score - sometimes, when you're moving from start-up to real business, it can all get a little overwhelming. You feel like you're on Everest, looking up, with three miles still left to scale - and that often isn't far from the truth.

This analogy - a single mountain climber, with finite resources - holds true for the typical start-up. Because you know with absolute certainty that only your own hard work is going to get you up to the summit. The only approach is to maximize what you have, put one foot in foot of the other - and walk up the hill.

However, to make that happen, you need to retain a clear idea of why you're on the climb - and not lose touch with the "why" of why you're on the journey - because you thought it would be fun/rewarding/challenging. Because if you do lose touch with your motivators, you'll soon find yourself left with a bunch of stress, missed deadlines, and upset co-workers.

Which is why a little clarity from a two year old can be useful.

As we were talking just now, my friend's two year old toddler came into his home office and sat on his knee and listened, as we went back and forwards over Skype about what we still need to get done, and how we should approach it. Then as the conversation lulled, my friend turned to his son and said, jokingly, "what do you think we should do?"

His son thought for a second, then shrugged his shoulders and said, in a cute two-year-old voice, "just play!"

His dad and I looked at each other for a second, and laughed. Then he said, "you know, that's not bad advice." And for a few minutes, we went back in time and talked about the less stressful days - the first few months after we started the company - when things were 100% fun and 0% planning.

It put a nice perspective on our current issues - and they suddenly seemed more manageable - and enjoyable - as a result.

Note: We know that we're beyond that crazy start-up phase now, and can't really ever go back to 0% planning or 100% fun. But at least, thanks to a two-year-old's advice, we were reminded to revisit our motivators. As a result, we now have a smile back on our faces - as we move up the mountain.