You’ve made the decision to found the business of your dreams. But where exactly do you start?
Getting off on the right track enables entrepreneurs to avoid many of the miss-steps that cause start-ups to fail. This is important because only 20% of new businesses survive for two years.
Many entrepreneurs assume the first step in starting a business is to develop a detailed business plan and financial projections. To prepare these documents facts and figures need to be collected from many third party sources. To ensure this feedback produces reliable data, everyone involved must have a clear and unified understanding of the entrepreneur’s vision.
An effective and easy way to accomplish this is to prepare a New Business Precis. This is a short tightly written document that can be printed on a single piece of paper or displayed in a single screen shot. This starting point for entrepreneurs was developed based on my own experience, and from reading a biography of Winston Churchill. He insisted that his generals provide him with short concise descriptions of their plans to be sure everyone involved in planning war tactics had a clear and unified vision of the operation. You can see a copy of Churchill’s memo at the end of this article.
Following is a template setting out the points to be included in a New Business Precis:
- Describe the company’s products/services and their features.
- Detail their advantages over the competition.
- Is the company selling B to B or B to C?
- A description of who exactly will buy the products/services.
- Scope of the market. Will the company sell locally, regionally, nationally, internationally?
- Will the company be positioned as a premium brand or sell on the basis of lower prices?
- A brief overview of the sales/marketing strategy.
- Current state of development. i.e. a successful market testing and prototype has been completed with X months of raising the required capital, etc.
Having a New Business Precis enables entrepreneurs to avoid potentially fatal errors when gathering information from a variety of sources. These may include: IT experts to advise on the company’s software needs and estimate their cost and development time, marketing and sales professionals with industry appropriate expertise on costs, time lines, and how to set up marketing tests, suppliers to get quotes and set specs for components to be incorporated into the new company’s products or services, and when doing basic market research to determine the scope of the market.
As well, a New Business Precis is a valuable tool when recruiting key employees, in describing the new company to lawyers, bankers, etc. One of its most useful applications is when reaching out to get preliminary feedback from prospective customers/clients.
During the earliest stage of setting up a business the founder’s thoughts and ideas must be flexible and basic assumptions will be tested in discussions with prospective customers/clients and those who will form the new company’s management team. Having a New Business Precis provides a useful platform for these discussions. It is easy to make changes to a New Business Precis as the founders’ thinking evolves through discussions and fact gathering.
It is important to keep an updated log of those who receive a New Business Precis to be sure everyone is working from the latest version when providing information to be incorporated into the finished business plan and financial forecasts.
To demonstrate the value of a New Business Precis here is an actual case study illustrating what can go wrong when an entrepreneur does not have one when collecting information that will be incorporated into a company report and financial projections.
The founder of this business is one of my closest friends. He is smart and driven to succeed, with over 20 years of experience as a senior executive in his industry sector. Several years ago he was ready to found his own company offering a service that would dramatically increase the efficiency of lawyers, accountants, real estate agents, and other professional service providers. To launch the company he invested $200,000 from his personal savings and raised $50,000 in seed money from close friends and business associates, including me. I invested on the basis of his character, expertise in the business sector, and his explanation of the innovative service his new company planned to introduce. This was described to me one evening over dinner. At the time, he had no detailed business plan or financial projections.
After raising the required seed capital, my friend began developing a detailed financial model for his new business. For guidance in determining the software required to deliver his new service he reached out to a senior software engineer. During a two hour briefing meeting, the founder described the service being developed and indicated the company was forecasting to have 5,000 to 7,500 clients within the next two years. Based on this information, the software engineer provided an estimate of three to four months of time to develop the software, at a cost of about $75,000.
When this meeting concluded, this company founder did not realize his new company had just derailed and was in big trouble.
Here’s what happened. During their briefing meeting, the company founder neglected to inform the software engineer that, before rolling out with a full scale sales and marketing program, the company planned a small marketing test with about 100 clients. This would test the new software in a variety of applications and help to determine the scope of the market.
Had the software expert been advised of the planned test, he would have recommended off-the-shelf software at a cost of $50 per month that involved no up-front development time or cost. It did not have the capacity to handle 5,000 clients, but was capable of handling a test group of 100.
As it turned out, results from the new company’s marketing test were disappointing. Now, having spent $75,000 to develop custom software, and more to cover four months of overhead costs, the company had no cash reserve to test an alternative marketing strategy. With a less than impressive marketing test, the founder was unable to raise additional capital and the company folded. This disaster could have been avoided if the software engineer had left the briefing meeting with a New Business Precis that included information about the planned market test.
During the early-stage start-up phase of any new business, entrepreneurs are juggling many balls. Even the most diligent and intelligent can run into problems similar to that described above. These situations can be mitigated with the use of a New Business Precis.
If you are not a good writer, it is worth the small cost involved to have this document professionally written. Try to tell the story on one side of one piece of paper.
After founding nine companies and working as a mentor/coach with dozens of start-ups, it is my belief that many early stage business failures can be prevented when founders take the time to develop a New Business Precis, before setting out to develop a full scale business plan and financial projections.See below for a copy of Churchill’s directive that motivated me to develop my first New Business Precis:
