Assembling the Team

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t e a / ~ , n i l ~ f o6 ective ··

C i § t & ~ · 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 th e 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?

~ v e n 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.1This finding is not surprising:

Cooperation and teamwork confer many benefits, often

. helping iridividuals to accomplish tasks they could not

complete alone. ßut working with others, like many .. . . . .

aspects of life, has a "downside" as weil as a potential

"upside;" l t 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 cofounders. 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 d r u ~ s . 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 high·ranking 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. 3In 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 forentrepreneurs 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 resourcewith 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 launch6 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 ß, 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 _ t 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 socialnetwork 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 networkof 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 findings9

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 needsat 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, an d easily

discouraged.2. Agreeableness. The extent to which individuals

are cooperative, courteous, trusting, and agree

able versus uncooperative, disagreeable, and

argumentative.

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CHA 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 individualsare 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.12Other 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

P ~ v i c l d 6p- the F o ~ 7Mvn

Have you noticed an underlying theme in this discussion? I f 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 capita l (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 whalthe new venture knows, and also, in a sense, who it knows. The broadcr and

rkher Ulls soun.:l:! uf s l r ~ ; ; : u ~ l h , l h ~ 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

I n d e ~ d , 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 thefollowing 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 KeyStrengths

To the extent the founding team

of a new venture possess these

characteristics, it may gain

important advantages in terms

of its future success.

learning

1bjective

Explain the difference

between human capital

and social capital and

indicate why the founding

team of new ventures

should be high in both.

learningobjective 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 th e Resources

- · · - · - - - - · - - - - - - - " - · L l . , u a t Z ' t ~ t : l i ~ ·Colrtlii?Jh- 9 e l i } e ~ ~ · - m ~ : ~ - i V e - n . ; ~ ~ ~ i 7 r e _ 7C'tzt/W a61/ut ['nt'l ·'),enett·H - and t rhat 'l1lä 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 variousdimensions, 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 findings16

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 individualswith similar background, training, and experience.

This can be detrimental to the success of the new

ventures they found.

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CHA 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: the·more 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 offencrucial 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 t e c h n i c 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 för

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 memberIacks 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 similar 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 ofcomplemen

tarity-people who can provide whatyou

don't have, and vice versa.



142 f' '' f ·, ,. Assembling the Resources

learning· 3objective .

Describe a new venture's

board of directors and explainhow 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,

AdvisersThe founding team plays a crucial role in the launch of any new venture-ho·w

could it be otherwise? But although it is important, the founding team is notthe 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 V i ' l e d o ~ v s -Any new venture that begins as a corporation (see Chapter 8 for a discussionof 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 the·new 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 thatultimately 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.

? Z e c ! U d t i l ~ ~ m p 0 j t M > · 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 trust19 (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.Z0

By hiring people they knöw (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 decisionwastes 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 firmsare 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 humanresources 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 Factorin 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 peoplethey trust.

learning 4bjective

Explain why a growing

number of employees is

not necessarily a sign

that a new venture is

successful.

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144 PA R T 2 Assembling th e 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 thenurnber 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 toseveral 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 (i t 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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CHA 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.25In 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

1 3 ~ a u t 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

advisers, 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 suchindividuals? 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.

S ' t w e > t t J ' V ~ c ~ n ~ atzet ~ v & l t l l r l & l i P ' t t J ~ y 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 manyentrepreneurs recognize their value

and are estab/ishing them in orderto 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 executives-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. (Choosingcofounders 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'tKnow-And How

toReduce 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 morediverse 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 theylike as individuals-is our first impression of

them accurate along key dimensions such as

their Ievel of conscientiousness (reliability,

dependability), extraversion (are they reallyoutgoing 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 -from·truthfulncnn,

.. through ~ J t e n t 1 0 0 to nonverbal cues-

f a c i ~ l expressions, body p o s t u n ~ or. ~ o v ~ m e n t § ; ~ I i d . c e r t a i ~ . rionverbai as

pects'(?fspee.ch {hot•related to the-_. r n e a ~ i n · g · '6hne Wtirds theyspeak..::for

... -- i n s t a n ~ e , the töne of v o i c e ) ~ · W h e n people· · - · · ·; i : ! ~ p ~ r t ~ f i ' Ö ~ f u ; { h - e " : t r q t h , ü ü ~ y ·c i t t ~ n : shbw -

. '' .-

.. verbal c ~ e s ; for instancei fadal ~ x , p ( ~ s s i o l i s are one chanhel, body. moveO,enti a r ~ -

another.). These are i n c o n s i s t e n c i ~ s be·

l \ . v ~ e n n ? ~ Y ß r q a ~ - c ü ~ s f r o m - _ qil:sic· c h a n n e l s ~ .l·m=•<:l<>·.rl'!<:l

. : . . _ . ~

ofteri frequeritly revealed by certain a s p c ~ t s of eye .cönfact. ·People \fo/hö are lying. often -.

blink m i , m ~ öften and -show pupils that a r ~ möre dil?ted thari someone. who is telfing

. · i f i - ~ trÖth:: They rrtay ·also s h o ~ 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\e·eye.

(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 entirelytruthful with us.

. .. : ~ : ; · : : . · > : .. - - ~ < - : _ ~ ~ t : . : · ~ ~ ~ : ~ ~ - - - \ ~ · } . • ; / : : · - / ; . : · .. : - ~ - - - . ' · · . . :<::. : : : : ~ " ' . : . ~ , . -·

'. ·_ .. .-.-->:·.: _··_·. :--;·'_:_. · . ..

Utilizing the New Venture's

Human Resaurces: Building Strang

Warking Relatianships Amang

the Faunding TeamAssembling 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).Z9One effective way of avoiding such problems is through a clear

definition of roles-the set of behaviors or actions that individuals occupyingspecific 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 se t 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 5bjective ·

Explain why it is useful

for 6ofounders to have

clearly defined roles in

their new venture.



150 ? ART 2. Assembling the Resources

learningobjective 6Define 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 jugglingact-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 resul t 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 r e l a t i o n s h i p ' ~ l ' & t ~ e f ; i:han they are, they also

tend to perceive that theyare receiving a smatler share ofavailable rewards than is appropriate. tn oiher words, they conclude that theyare 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 situatiön.In

other words, weperceive 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, bu t 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 gobadly.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, an d 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 powerfulself-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 e n e r ~ 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 INRETURN.

1iii:5Ci!

E

"'0..::

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/lya/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 canbe highly

beneficialto

entrepreneurs,but

inorder

to

succeed, bothsides

mustperceive

themas fair and as

yieldingreal 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 e v e n t ~ in the personal columns it

runs for 550 m 1 w s p a p t ~ r s .

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CHA 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 i f 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 areunlikely to survive.

~ § t e c t i v e C()tnJnMiui.tMtt

Perceived unfairness is not the only cause of costly conflicts between membersoLa 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, especiallynegative 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

learningobjective 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 -occur s as soon as possible

after the poor or inadequateperformance

Does not attribute poorperformance to intemaf causes

Specific-focuses on aspects ofperformance that were inadequate

Focuses on performance,not the recipient

Offers concrete suggestionsfor improvement

lnconsiderate-harsh, sarcastic,biting

Contains Ihreals

Not timely-occurs after an

inappropriate delay

Attributes poor performanceto intemal causes

General-a sweepingcondemnation of performance

Focuses on the recipient

Does not offer concretesuggestions for improvement

Constructive: "I was disappointed in your performance."

Destructive: "What a rotten, lousy job!"

Constructive: "I !hink improvement is really important.". Destructive: "l f 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 nexttime 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 i t 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'unication 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.36In surn, conflict between founding team mernbers is not

necessariiy a bad thing. Rather, it-like all other aspects of the new venture'sopetations-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

l e a r · ~ , f ? , i n y tJ6 -eclitJe5c::i§ttn 'Madiny thi; c.hapte,, jM U ;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 importantpart 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'sfuture success.

8 Describe the steps entrepreneurs should take to

make their verbal prcscntations to potential investors

truly excellent.

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CHA 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 mayhave 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 nokeno«gh, t h e ~ w h ~ ! can ,

entrepreneurs do to gain the r e ~ q ~ r c e s they n e ~ d ? For ·

many entrepreneurs, a Jarge ·pB.rtof the a n s w ~ r : i 1 1 : v q l ~ e $ .preparing a truly first-rate .b.Lisiness plan. This f Ö t r n ~ l ; ·written expression of the entrepreneur's vlsion···for

converting opportunities into äprofrtable, g o i n g ~ & s i n E 3 s S is, in most cases, the entry card for s e r i o u s c o r i s i d e r ~ t i o n by venture capitalists, banks, and other sources of

funding: Most won't even think about supporting a newventure 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. Inorder 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 nextto

the taskof 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 th e Resources

Figure 7.1Business Plans: How VCs

Evaluate Them

Business p/ans-or at least good

o n e s ~ o f t e n find their way to the

desks of venture capitafists who

vafuate them from the point of

view ofmaking-or no tmaking-an

in the new ventures

in these p/ans. How do

actuafly evafuate business

se decisions?

though it would be comforting

is

rational, research findings

that often it is not.

1of a

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.ülo Persuading other people to support your new venture involves several other

steps as weil.· For instance, i f your plan is one that generates initial positive

reactions on the part of venture capitalists and other investors to whom yousend 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.

WhyWrite a

BusinessPlan?

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 ofa good businessplan as a means of gaining resources, financial anrl otherwise.

We'll now consider both of these issues.

1 3 ~ ttJ the " [ ; ~ katn: 7he 7/aiue

()j- CieaJv- Cut q o a ~ y Perhaps the simplest yet most important answer to the question, "Why write a

business plan?" is this: l t 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 adetailed 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 mentionedin

the title of this chapter. More to the point, a wellprepared 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 inadvance 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 becomesnecessary. 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 thathe 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 untestedassumptions.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 simplebusiness plan,which can beused 'to obtciin

initiC,ti Fimding.if'

itis needed . ·

Refine. the businessplan on 'the basis of

~ e n c e , 99ined from

r:unnin9. t h e ; b ~ s . i r e s s , ·and lhe r e v i ~ plpn .to c o n d ~ c t . b u s i r i e s s and$ e c u ~ e c : K l e l i t i 9 r i ~ l funding

a . s n ~ ~ s s C J . r y

Coili1nueki

9 r o w i i i ~ · · b u ~ i r i ~ s s , : - ; ·

: P t : ~ ~ ~ d .•

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 !argeamounts 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 youdevelop to the specific needs of your new venture.

13u5irleJ-5- Plans fAy a 70tJt j - t J - ~ o / a i l ~ F i l z a ~ U i a t 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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CHA? 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 acompany 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 businessplan.

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 successful4

(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 processthrough 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 RequirementsDusiness 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 otherinvestors 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.)




learning 2bjective

Explain how the process of

persuasion plays a key role in

business plans and in the

success of new ventures.

i l If the plan is designed to raise money, how much funding is needed,

what type of financing is required, how will i t 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, bu t should not seek to "wow" readers with showy illustrationsor 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, an d in

general, the shorter the better. In fact, many experts agree that 25-35 pagesshould 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 windowof 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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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 m a l < ~ ·

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, potentialmarkets, competitors, and the founding team's ability to run the company. Soin 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

· nto preparing a super-impressive business plan, you absolutely must getfeedback 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.

' i h e ~ e t J ~ 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 wantedto 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 3bjective

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 4bjective

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, theexecutive 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 i t 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 i t 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 theamount 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 appropria te.

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.

l 3 a d ~ w u t , P'Wc/ud Md O p p t J ~ 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 specificpeople 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 tooffer-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 itV\>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 th e Resources

Figure 7.5

Market Analysis: Sometimes

Uncertain, But Always Essential

Entrepreneurs should always devote

careful attention to the fo/towingquestion: "What is the need for our

product or service?" Why, in otherwords, would anyone want to buy or

use it? Market research can often

hefp to answer this question, which is

what the founders ofCritter 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. Thisexnmple i/lustrntes thP. importanre

of ncludlng 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 basicnature 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 i t is important that it be

presented first.

/ n t V J ~ c e t aM!ffuyMany products that corne to market disappear quickly and without a ripple.

The potential rnarkets for which they are intended either ignore them or donot 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 howthe 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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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 specificsof 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 i f 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 thatentrepreneurs 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 ~ 'TeaJnMany venture capitalists note that they would rather invest in a first-rateteam 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 toknow 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 productor 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 thequalifications 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 i f 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 debtit

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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lncludes sates as they are generated

lncludes depreciation

lnterest on loans is included

Beginning inventory and ending inventory areincluded 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 för working capital. Many

beginning entrepreneurs are unclear about the difference between income

statements and cash flow statements, so we have highlighted these distinctionsin Table 7.1

Another key part of the financial section-one also discussed in Chapter6 -

~ h o u l d be a breakeven analysis, a table showing the Ievel of sales (and

production) needed to cover all costs. This analysis should include costs thatvary 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 theirenthusiasm 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 7 a ~ 5 - : 1Je5dti61nf 7l/hat 1 1 1 ~ 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:

l i Price cutting by competitors, who refuse to "roll over and play dead" forthe 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

l n c ~ o m e . Statements and Cash

Aow Statements: Some'Key

D i f f e r ~ n c e s ·As shown here, income statemf!crts

and cash flow statements dirlitt in .severa( importeint respects . .




7.7

w Ventures Face Many Risks

to sink a new venture afmost

it has begun. For instance, in

fate 1990s, a new venture caUed

was started to provide the

of personal computeß with

devices. Before the company

bring its products to

the price ofsuch computers

so fow that interest in

antitheft devices aU but

The resuft? HandsOff

its resources

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

I i Difficulties in raising additional required financing

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 i f 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 planningtheir business model and business strategies.

1 Z ~ ~ I-he 1ZwU!tdY: HaJWe>t und ~ ß 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 i f the cornpany has an

initial public öffering (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."

und lntiesmneyA 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 theoperations 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 (i f 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 suppliersReaching agreements with corporate partners i f these are desired

companies with whom the new venture will work closely and for mutualbenefit

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 thecompany'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 toexamine 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 bothdone 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




learning

5bjective

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 toavoid 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 forNew Venture

· B u s i n ~ s s 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 therejection 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: "l f 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 t ~ e 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 summaryis too long and does

not get to the point

lt is not dear where the

product is with respectto production

lt is not dear why anyonewould 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 arewildly and unreasonably

oplimistic



222 ,. · r. .,, 2 Assembling the Resources

learningobjective 6Explain 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. Wedoubt that fmancial issues were

real/y the ones that /ed to her

decision.

How VCs Actually Evatuate Business

Plans: ldentifying the Key FactarsEarlier, 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) thefounding 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 newventures? 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 willmanyyou."

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. Forinstance, suppose one factor believed to affect

VCs' decisions is market familiarity-the

extent to which founding tearn members

The New Yorker, January 10, 2000.have experience in this market. The experience

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CHA 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 insome 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

studies12and 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 thefounding 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 Zacharalös & 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 capturingmethods 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.

learningobjective 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 : m a t we n t n k 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'treally 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 instance16

in

some cases, the pressure to write a lengthy anddetailed 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. To 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 bottom 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. To 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 forincreasing the ch.ances that the new ventures

they create will be successful.

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Making an Effective Business PlanPresentation: The Ball ls Definitelyin Your CourtR e s e a r c h ~ r s 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 toexperience 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

learningobjective 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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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,

notdoubt, 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 ofyour 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 i t 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 yourcomments 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.taffhad 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 background-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 somepotential investors.

11Show enthusiasm, but temper it with reality checks. As we've remarkedat several points in this book, enthusiasm does indeed sell, so up to a

point, i t 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 offriends 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.)

S o m e ~ r e h e a r s a l s 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 attendedmany 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 otherinvestors 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.




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 wererejected 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 besweet. Good luck!

A business plan is a written document

that explains the entrepreneur's basicbusiness 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 ace-to-face presentation of

the plan by the entrepreneur to venturecapitalists 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 companiesand

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 thefollowing:

Background, Purpose, and Opportu·

nity: A description of your idea and the

current state of the business.

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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. . .

Develöpment, Production, and Location: Where

the produtt. service is in · erms 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.

Harvestor

Exit: A description of how investors willgain 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 complexones.

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.

B u ~ i n e s s 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

. elativE). ~ t r e n g t t ) ,

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 achallenge-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 th e 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 · ts

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 i t 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 summaryis 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 = verypoor; 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 ManagementTeam 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

"döwnside" of making · these ptöjections too

optimistic?

6. Why should business plans include a full disclo

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

i t 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 adifferent group of people rate it.

4. Continue the process until the ratings on all

dimensions are 4 or 5.

describe i t 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 thefollowing steps can help you avoid these errors

and increase your chances of obtaining the funding

you seek.

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1. List each member of the founding team of your

ne w 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 an d professional

organizations, experience in running previous

businesses (even small, informal ones), writing

experience, an d 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 informationthat supports their ability to fulfill these roles, bu t

don't include information that isn't relevant to the

role. (For example, don't sa y that your head of

marketing was the president of he r 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 away that will be obviolis to potential investors. If

it does not, go back to the drawing board andstart 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 tocollocl 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 · he 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 awull-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 CD·Rom

lectures

Market Position-Leader based upon exclusive

agreements with top thought Ieaders in dentistryand 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


Company Product-Tigerview

Market Position-Leader due to Tigerview's position

as the leading technology as determined by third

party research

d. Product Showcase


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 goneare chronicled in the Archive's repository, and series of

snapshots of sites from aarliest inception, to heady vcfunded 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'sproject, where would you Iook for new acquisitions?

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1 Bartlett, S. (1995); "Seat of the Pants," Inc. (October 15),

38-40.

2 Meyer, G.D., & Meeks, MM. (2005). TI1e fallacy of business

plans: Effectuation, real options, and focused alertness.

Paper presented at the Babson-Kaufmann Entrepreneur

slUp Research Conference, Babson Park,MA.

3 Chrisman, J.V., McMullan, E., & Hall, J. (2005). TI1e

influence of guided preparation on long-term perfor

mance of new ventures. Jounuzl ofBusiness Ventufing, 20,

679-791.

4 Zacharakis, A.L., & Meyer, G.D. (2000). The potential of

actuarial decision models: Can tl1ey improve the venture

capital investment decisions? Jourl1ill of Business Ventur-ing, 15, 323-346.

5 Fletcher, C. (1979). Impression management in the

selection interview. In R.A. Giacalone & P. Rosenfeld

(Eds.), Impression Management in the Selection Interview(pp. 269-272). Hillsdale, NJ: Erlbaum.

6 Zacharakis, A.L., & Shepherd, D.A. (2001). The nature of

information and overconfidence on venture capitalists'

decision making. J umal ofBusiness Venturing, 16, 311-332.

7 Pierce, S. (2005). Giving paws. Entrepreneur (July), 112.

8 Baron, R.A., & Marlanan, G.D. (2003). Beyond social

capital: The role of entrepreneurs' social competence in

their financial success. Journal of Business Venturing, 18,

41-60.

9 Buehler, R., Griffin, D., &MacDonald, H. (1997). The role

of motivated reasoning in optimistic time predictions.

Personalillj and Social Psychology Bulletin, 23, 237-247.

10 Franke, N., Gruber, M., Harhoff, D., & Hankel, J. (2006).

What you are is what you like-similarity biases in

venture capitalists' evaluationsof start-up

teams. Journalof Business Venturing, 21, 802-826.

11 Baron, R.A., Byme, D., & Branscombe, N. (2005). Social

Psycho/ogy, 11th ed. Boston: Allyn & Bacon.

12 Shepherd, D.A., Zacharakis, A., & Baron, R.A. (2003).

VCs' decision processes: Evidence suggesting more

experience may not always be better. Journal of Business

Venturing, 18, 381-401.

13 Bhide, A. (2000). The Origin and Evolution of New

Ventures. New York: Oxford Universi ty Press.

14 · Shane, S. (2003). A general theory of entrepreneurship.

Cheltenham, UK: Edward Elgar.

15 See note 2.

16 Seenote 2.

17 Greenberg, J., & Baron, R.A. (2007). Behavior in Organiza-

tions, 9th ed. Upper Saddle River, NJ: Prentice Hall.

. ·•·.

Documents

Assembling the Team