Significance of Business Plans - Thesis Example

?Research proposal: Significance of business plans Table of Contents Introduction 2 2.Literature Review 4 3.Research questions 6 4.Research design and methodology 7 a.Research question 8 b.Research Format 8 5.Expected outcomes 9 6.Conclusion 11 7.References 12 1. Introduction The Venture Capital (VC) sector is the backbone of innovation and is crucial for the transformation of unique ideas into valuable business enterprises. Without venture funding, firms such as Google and Facebook would never have even existed. Individuals with a unique business proposition often seek external seed funding in order to invest in necessary resources that can facilitate idea transformation into sustainable business models. However, the task of obtaining such funding is not easy and requires considerable analysis on the part of the entrepreneur. In this context, a business plan serves as the medium through which an entrepreneur explains his ideas and tried to convince a potential investor on the viability of the project. As such, a business plan contains elements of the concept, operational effectiveness, strategic direction and financial estimates. In most cases, venture capitalists insist on having a thorough analysis of all risk factors and an evaluation of all possible scenarios that can affect the company’s growth. Today, the venture capital industry has not only emerged into a major driver for economic growth and stability, but has also evolved into one of the major sources of job creation and innovation (Silver, 2009). Thus, the importance of a business plan in this context is very important and must be thoroughly investigated. Besides serving as a benchmark for possible funding, the business plan provides an investor with an overview of the company’s estimated value and offers a set of milestones that the entrepreneur aspires to achieve during the funding period (Landstrom, 2005). Further, a business plan provides investors with an overview of possible methods through which they can earn a decent return on their investments. Given the numerous objectives realized through the development of a business plan, it is believed that understanding its significance can be beneficial in managing a business successfully. Besides, gaining an insight into business plans will provide an overview of the expectations and potential areas of investment that will be explored. Thus, besides helping young firms secure funding, the proposed study will also be useful for guiding mature companies in their daily activities (Sherman, 2012). Such knowledge is also relevant in the case of project financing as there is a constant need for monitoring the progress of the project and taking necessary steps by comparing current scenarios against established benchmarks. Given the wide range of business areas that can be served through the use of business plans, it is important to understand the prominence of business plans in promoting entrepreneurship and modern finance. 2. Literature Review The literature review has been undertaken with a view to understand the relevance of business plans for funding purposes. In addition, information on the recommended contents of such plans was also obtained from various secondary sources. While the proposed study provides information on the specific contents of a general business plan, the following paragraphs shed some light on some of the qualitative factors that entrepreneurs must consider when developing their business plans. According to Berkery (2007), entrepreneurs who successfully secure funding need to encompass many details into their business plans. Most importantly, a business plan should provide the perfect ‘positioning’, convincing the venture capital investor of its success and profit potentials and its place within the overall industry. For example, seeking investments to develop ideas based on social networking (such as Facebook, Dropbox, Instagram) etc., are likely to receive greater approval than those that seek to develop unique technology for the defense sector (Blair, 2008). In each case, the investor evaluates the target industry sector, range of potential customers and the estimated lead-time in revenue and profit generation. In addition, Hill (2001) notes that the probability of receiving initial investor attention is improved if the entrepreneur has succeeded in implementing their idea, at least to a partial extent. In other words, VCs are reluctant to consider proposals that are based on mere untested ideas. For instance, an entrepreneur who has a working prototype of the product is likely to be granted more meetings with VCs in contrast to one who relies on a sole idea. McGarty (2009) says that positioning in a business plan should make the investor go ‘wow’ on its value proposition and encourage them to investigate the concept further. Without this, there is not much scope for further meetings with investors. Bloomfield (2008) also stresses upon the significance of presentation and aesthetic detail in a business plan. Besides being accurate and complete, a business plan should appear sophisticated and professional in design. It should reflect the creativity of the entrepreneur and their passion and conviction in the idea. Besides focusing on different qualitative factors, the preliminary literature survey has yielded other interesting information. Firstly, one has to undertake an extensive research of the target market and analyze every perceived competitor in great detail. Coyle (2006) finds that 95% of VCs do not consider an idea that is not backed by relevant market research and statistics. In some cases, VCs appear to be impressed by an accompanying website that conveys the idea through an alternative medium. The analysis has also led to the conclusion that VCs do not invest in the company or idea per se, but invest in people whom they believe in. Thus, an entrepreneur with strong contacts in the VC industry stands a better chance at obtaining funding than others. Moreover, Bangs and Henricks (2005) stress that investors prefer entrepreneurs with strong expertise in their target areas. Thus, individuals who have relevant professional experience enjoy better prospects provide they succeed in garnering initial attention of the investor. Apart from investing in the idea and the growth promised by it, investors seem to back startup firms that are steered by a strong management team. Crego (2005) says that an entrepreneur who appears weak and has to fight it out all alone has fewer chances of investor support despite having a good product or concept. Thus, he recommends that it might be worthwhile for entrepreneurs to team up with like-minded individuals who believe in the idea and have a strong foundation to support its development. 3. Research questions The proposed study aims to analyze the following questions, which are deemed important for understanding the role of business plans in securing capital and nurturing business growth: What is the relevance of positioning the concept and its role in attracting VCs? What are the various constituents of a business plan? What is the optimal or recommended size of a general business plan? What is the optimal mix in terms of creativity and analytical information that must be included in a business plan? What are the inherent elements of the business model proposed within a business plan? How much time does one require to formulate a plan? What is the role of market and competitor analysis in convincing investors? What are the methods to forecast future cash flows that can be generated by the business? What are the complementary factors that an entrepreneur must focus upon (in conjunction with devising a business plan) to gain the attention of potential investors? What industry benchmarks and standards (such as SWOT and Porter’s 5-forces analysis) can an entrepreneur include in the business plan? What methods are utilized to determine the required amount of funding? How does a business plan evolve as the business develops? What is the role of a business plan in subsequent rounds of financing (such as Series-A, Series-B rounds) etc.? 4. Research design and methodology As described in the initial proposal, the study shall utilize both primary and secondary sources to obtain information pertaining to the questions specified above. Besides sourcing information from relevant books, journals and magazine articles, a comprehensive survey based on a detailed questionnaire shall be organized to obtain latest information on trends in the VC industry and investor expectations. Besides, relevant qualitative and quantitative methods will be utilized to arrive at suitable inferences that will help understand the topic of this study from a closer perspective (McBurney and White, 2009). a. Research question To analyze the role of business plan in securing VC funding and in guiding young businesses towards sustainable growth and profitability. b. Research Format In general, any research study is driven by a strong philosophical foundation that can be classified as either positivist, critical or interpretive. A study can be categorized as positivist in nature if the results are based on a set of quantifiable variables and rely on the formulation of a suitable hypothesis (Mcneill and Chapman, 2009). However, it is not relevant for this particular study as it ignored the importance of human behavior and tendencies and the cause and effect relationship that operates among individuals. The study can neither be identified as ‘critical’ in nature since it does not focus upon social critique and rests on the standpoint that business plans are essential to the success of modern companies (Graziano and Raulin, 2009). Instead, the primary purpose is to identify the different elements that contribute to this significance and their interrelations in guiding both the entrepreneur and the VC investor. As explained in the literature review, the research will depend on the success of business plans in enhancing social constructions through the use of shared beliefs, documents and communication. The study will not commence using predefined notions, but instead focus on deducing the complex fabric that make business plans such powerful instruments in reshaping the industrial and economic landscape (McBurney and White, 2009). As a result, the proposed study will be more interpretive in nature and utilize every social context to understand the chain of intentional actions that lead to a business plan and its subsequent use. An interpretive methodology is believed to be the most suitable strategy for this study as it can assist in identifying all social and organizational factors that are covered by business plans. Moreover, this approach is also useful in highlighting the level of acceptance, impact and influence of business plans in the evolution of startup companies and their role thereafter (Mcneill and Chapman, 2009). An important constituent of this analysis will be the questionnaire-based surveys that will include both numerical and descriptive questions. In fact, separate questionnaires will be developed for VC firms and entrepreneurs with a view to garnering as much relevant data as possible. A number of VC firms and entrepreneurs will be contacted and requested to respond to the survey and their answers will subsequently be aggregated to develop useful inferences (Graziano and Raulin, 2009). Some of these questions will be numerical in nature where respondents will be requested to rate their preferences. For example, VC investors will be asked to rate their preferred industry sectors and level of education among candidates seeking funding opportunities. Such responses can then be collected, pooled and analyzed further to identify trends and ranks among various related attributes. 5. Expected outcomes Besides providing answers to the questions described in the preceding sections, a number of interesting results are expected during the study. The quality of the business plan and the level of detail are expected to aid a potential investor in determining the level of control and stake to be gained over the company. Besides, it is also expected that a business plan will help an investor decide whether to participate actively in the business or to rely on the entrepreneur for day-to-day operations. The study is also expected to help understand specific parts and attributes of business plan that influence the decisions of VC investors (Berkery, 2007). Most importantly, the average time spent by the investor on a business plan is likely to be evaluated from the survey. From the entrepreneur’s perspective, the average time spent by them in writing up a business plan shall be estimated. In addition, the reasons that force entrepreneurs to modify their business plans and improvise will be given due consideration. In cases where funding was successfully obtained, the precise elements (in the plan) and strategies that helped attract investor attention will be uncovered (Hill, 2001). Another interesting area to explore is the different components of the business plan, which are most frequently scrutinized by investors. There is also the need to examine whether business plans fulfill additional roles in negotiating ownership structures, funding size and investor oversight. Entrepreneurs are also expected to answer whether the business plan helped them improve the concept and gain confidence to approach investors (McGarty, 2009). Some supplementary issues can also be evaluated as part of the study. Examining the popularity of VC funding in relation to debt and cash financing (personal investment by the entrepreneur) and the accompanying conditions and restrictions on each funding option can be undertaken (Bloomfield, 2008). Whether entrepreneurs prefer VC funding upon having exhausted all other possible options needs to be explored further. Another interesting point to investigate is whether entrepreneurs use the same business plan or improve the document for every subsequent round of financing. The comprehensive analysis proposed by the study is primarily intended to assist and encourage new entrepreneurs who do not have much experience in developing a sound business plan. While the study will serve as a guide in completing every necessary part of the business plan, it is also expected to aid entrepreneurs in evaluating and implementing their ideas (Coyle, 2006). Entrepreneurs will be aware of potential pitfalls that must be avoided when contacting potential investors and during negotiations. Thus, the proposed study can be used to formulate strategies to secure adequate funding under favorable terms and instill responsibility in both parties towards realizing all business objectives (Bangs and Henricks, 2005). The study is also expected to be useful in scenarios where the firm is funded by multiple investors. In such cases, the challenges facing entrepreneurs abound and need to be tackled at the earliest if they are to focus their attention towards managing the business enterprise (Silver, 2009). Hence, the study aims to achieve many goals by using the business plan as the primary element. 6. Conclusion A clear research question backed by a sound research framework is expected to aid in the effective completion of this project. There is no doubt that the study should be extensive and based on a thorough strategy in order to find solutions for all the questions described in the preceding sections. The research methodology will be highly flexible in nature and capable of exploring interesting outcomes when encountered. Three key factors – business goals, stakeholder expectations and plan quality – will constantly influence the outcomes of this study and will help in developing the questionnaires. In addition to serving as a benchmark and guide for the entrepreneur, the importance of a business plan as a sales document must be studied in depth. Whether entrepreneurs seek external help and feedback must also be investigated appropriately. Thus, a clear overview of key areas that must be explored and the use of a sound research methodology are expected to aid in this analysis. 7. References Bangs, D., and Henricks, M., 2005. Business Plans Made Easy. London: Entrepreneur Press. Berkery, D., 2007. Raising Venture Capital for the Serious Entrepreneur. New York: McGraw Hill. Blair, E., 2008. Venture Capitalist Decision Making and the Priming of the Subconscious Risk Construct in Entrepreneurial Business Plans. University of Wisconsin - Madison. Bloomfield, S., 2008. Venture Capital Funding: A Practical Guide to Raising Finance. London: Kogan Page Publishers. Coyle, B., 2006. Venture Capital: Corporate Finance. Boston: Global Professional Publishing. Crego, E., 2005. How to Write a Business Plan. American Management Association. DeThomas, A., 2001. Writing a Convincing Business Plan. Boston: Barron's Educational Series. Graziano, A., and Raulin, M., 2009. Research Methods: A Process of Inquiry. New York: Allyn and Bacon. Hill, B., 2001. Inside Secrets to Venture Capital. New York: John Wiley. Landstrom, H., 2005. Pioneers in Entrepreneurship and Small Business Research. London: Springer. McBurney, D., and White, T., 2009. Research Methods. London: Cengage Learning. McGarty, T., 2009. Business plans that win venture capital. University of Michigan. Mcneill, P., and Chapman, S., 2009. Research Methods. London: Routledge. Sherman, A., 2012. Raising Capital: Get the Money You Need to Grow Your Business. American Management Association. Silver, D., 2009. The Social Network Business Plan: 18 Strategies That Will Create Great Wealth. New York: John Wiley. Read More