Don't Do Anything in a Vacuum
After having been through numerous business plans and client meetings in preparation for an equity capital symposium earlier this year, some common issues in the market sections of the business plans stuck out. It seemed appropriate to mention some of them for entrepreneurs looking for funding and for those just getting started.
This is probably the most basic element in a business plan and it's surprisingly often missing in action. A lot of things are technically possible but unless they provide tangible benefits to potential customers—at a cost that provides some measure of return for them—your chances of succeeding are slim. Your best bet is not to do anything in a vacuum. That means checking with potential customers early on and periodically thereafter. That way, you'll find out if your product idea is indeed a good one, and you can then incorporate customer needs and wants into your product development and market planning cycles. Also check with industry groups that may have identified problems that you can solve with your product. Armed with this information, you can better articulate the need for your product in addition to any market sizing numbers.
You must be as realistic as possible here. Yes, bigger may be better, but if it doesn't apply to your product or market, meaning it is overly broad, you come across as not being knowledgeable about your market. Get as close as possible to the real number. If you are manufacturing a piece of equipment that goes into dental surgery equipment, your market is not the total amount consumers spend on dental visits and toothpaste. It's a portion of the dental equipment sales market. In other words, it's part of the market for items that are sold to dental surgeons and clinics, not what consumers spend on their teeth. There's a huge difference in market size. If you get close to the actual number, you will stand a better chance of having venture capitalists perceive you as knowledgeable about your market. As long as your market numbers are in the realm of reason, it doesn't matter if they aren't exact; VCs will ultimately do their own due diligence once they are interested in your business plan.
Many entrepreneurs do not correctly identify their customers in their business plans. The customer is, simply put, the one who will buy your product. That means that if you develop the latest and greatest solar cells and modules to be incorporated into solar systems, your customers are the systems integrators and not the end users who buy the solar systems. This goes hand in hand with the market sizing, because if you don't have the right target customer, your market numbers will likely be wrong.
Many entrepreneurs really get hung up on this. They feel if they don't do something with product branding, they'll fail miserably in the marketplace. Well, for technology entrepreneurs in a business-to-business environment, nothing could be further from the truth. The most important thing you can do is to create some credibility around your company name. Consider this scenario: After successfully launching a product in Market A, you decide to go into Market B with a version of your first product. If the first product was launched with a product name only, it will be harder for potential customers to get information on your company, and the product won't relate to your new market. Buyers won't know what to think. If, on the other hand, you concentrate on your company name, and associate the product name with the company (think along the lines of Microsoft: Microsoft Word, Microsoft Excel, etc.), it will be easier for you to grow and enter new markets.
And speaking of names, after researching possible names, be sure to protect both your company and product names by trademarking. It's just as important as getting patents on your intellectual property. Contrary to popular belief, your company name is not protected through your state's company registration process. If you neglect to trademark your names, you run the risk of being sent a cease and desist notice, or worse, being sued. If you have invested even a small amount of money in advertising and promotion under a contested name, it will have been in vain. It's best to do a search on trademarks at www.uspto.gov before naming your company or products, and it is strongly suggested that you engage legal assistance for trademarking.
I have seen some outlandish marketing statements in business plans. There are no guidelines for what you say, but just use some judgment. The fact that you've sold 25 units in a 1 million-unit market does not necessarily constitute a huge need or pent-up demand for your product. Success in the marketplace is never guaranteed so don't even think about saying this. (Sadly, this statement is used fairly often.) Don't go the "we don't have any competition" route. (This comes up even more frequently than saying success is guaranteed.) If there is no competition and no one waiting in the wings to compete, is there even a need for the product? You may be using a different technology than others in the market, but that doesn't mean there's no competition; it simply means that you have the ability to differentiate your product in a meaningful way that customers will appreciate.
Probably the best thing that you can do is walk away from the business plan for a while and then come back to reread it, as objectively as possible. Better yet, see if someone you trust who is not familiar with your industry can read your plan and clearly understand the need you are addressing, who you intend to sell to, and why he or she will buy from you. That way you might be able to assess the market section a little better and make some really good upgrades to the overall business plan.
Betsy Gillette is director of market research and planning for Technology Ventures Corporation.