1. Identify your company’s strengths and weaknesses.
2. Figure out how much money you’ll need.
3. Get clear direction, which can help eliminate stress.
4. Summarize for lenders, investors or partners.
5. Evaluate the market for your product or service and size up the competition.

My personal favorite is No. 3, particularly the phrase “help eliminate stress.” It’s not as if the business plan eliminates uncertainty, but business planning does manage and reduce uncertainty by laying things out where you can see them more easily (like cash flow, for example). The interrelationships between the different parts of the business are not all intuitive.

Point No. 4–summarize for lenders, etc.–bothers me. Too many people miss the benefits of business planning because they don’t need to show anything to anybody else. If that’s your case, look at points 1, 2, 3 and 5.

That link is “Why You Need a Business Plan”–WSJ.com

What our lack of funding made us do is go back to basics. We know we had the seed of a good idea but struggled to come up with a sustainable model. Along with lots of hard work we talked with potential customers and came up with a solid way to generate revenue. Our potential customers are now signing letters of support saying they like our product and find it beneficial for their business and are willing to be contacted by investors. We have never had this in previous attempts to raise money and now feel confident in our plan.

The author, who has a screen name but not any additional details, makes this excellent conclusion:

Don’t despair if you haven’t gotten funded yet. It could be a gift in disguise.

Good point. And good example.

Which reminds me: If you’re an entrepreneur looking to get funded, go to thefunded.com and angelsoft.net. Both of those are excellent sites, very valuable for entrepreneurs, free and very useful. Oh, and by the way, if you’re an Oregon entrepreneur and looking to get funded, go to Willamette Angel Conference. Please.

(Photo credit: William Attard McCarthy/Shutterstock)

Here’s a hypothetical example. Suppose you just invested $250,000 in Acme LLC, a promising startup. Let’s say you got 25 percent ownership for your money. Years go by, and Acme grows in sales, profits and cash flow. In fact, it’s so good that it becomes cash-flow independent, meaning it’s generating enough cash, month by month, to pay salaries and fund growth.

As a successful high-tech company, Acme doesn’t make high profits. Instead, it pours as much money as it can into more growth through better marketing and better products. It buys ad words and search terms. It grows. Let’s say it reaches $1 million sales in three years, and $2 million in five years. And it keeps a healthy balance sheet, just enough cash to feel safe and no real debt.

In theory, and on paper, your investment value in Acme grows too, along with the company. Let’s say that by the time Acme’s running at $2 million annual sales, it’s worth $4 million, twice sales. So your 25 percent is worth about $500,000, twice what you invested.

Sounds like a great story, right? It is for the founders. They’ve been employed all along, and let’s assume they’re taking fair salaries and working on their own company, and their own dreams. Now they have 75 percent ownership in a good company. As long as they keep minding the business and watching the cash flow, they’ve made it. They can brag on their blogs, join the speaking circuit and send their kids to really good schools.

But it’s not necessarily great for the investor. Because that theoretical valuation of $500K is just that: theory. You, the investor, don’t get paid unless you can turn that value into cash. Acme, without an exit, also known as a liquidity event, is an investor’s nightmare. You end up having spent big money to build a business that may last forever without giving you any money back.

If you ever wonder why investors want majority shares, or why they tend to invest in groups with other investors, this example might help. It’s not that they don’t trust your  motivation, but they know that things change; sometimes entrepreneurs who started a company with an exit strategy end up changing their minds. They want to keep it forever. And where does that leave investors?

(Photo credit: FuzzNails/Shutterstock)

In baseball, pitchers don’t always throw strikes (good pitches). They get up to three bad pitches per batter. And batters don’t always hit the ball. Players who get successful hits more then 30 percent of their times at bat are really good. In the major leagues, fewer than 10 have ever gotten 40 percent for a season. And the scoring includes errors.

In business, we make mistakes. And you’re going to make them. And when you do, you should acknowledge, file it away so you can use it as experience sometime later, and go on with your day.

If you can’t make mistakes and live with them, don’t start a business. Don’t run a business. Keep your day job.

(Photo credit: deepspacedave/Shutterstock)

But what really matters is that this is a very good list. It matches my dealings with startups and investors, on both sides of the table.

1) Strong sense of the key milestones–Entrepreneurs often ask what metrics they need to get to in order to get an investment. I often turn that question around and get them to tell me what the important milestones are.

In a nutshell: Metrics. Trackability. He adds: “Milestones are a waterfall–and having them as goals should inform product, marketing, financing, etc.” Agreed.

2) Implementation of a product strategy–More so than any other aspect of the business, the thing I see early entrepreneurs tend to drop the ball on most–myself included–is product strategy.  I’m not saying you have to know all the answers, but you should at least know what your landing pages are trying to accomplish, where they’re going wrong and what steps you’re taking to identify the solution. I like to know that, even if you haven’t figured everything out, you have a process around product–so this way I can bet that you have the tools to figure it out.

The product road map included, and this gets even more powerful when you add on the milestones in the first point. In the post he adds the practical question, “How do I know you’re not going to spend the whole financing moving the search box around when it turned out that being on mobile was more critical to your success?”

3)  A theory on customer acquisition–You may not even have your product out yet, but having a reasonable sense on how people are going to discover it–past the buzz around your launch–is necessary. Just tell me how the first 10,000 users who aren’t your friends find it–and if it’s viral, tell me why people pass it on other than “because there’s an invite friends link.”

And, within that, this very real note about what doesn’t work:

If your strategy is to reach out to all the bloggers in your industry and get them to write about you, that’s pretty much what every other startup is going to do–and anyone who has done it will tell you the results will likely be underwhelming.

So make it real, and also realistic. Don’t just do what everybody else has done.

4) A financing strategy that gets you *somewhere*–When I say *somewhere,* I really mean one of three outcomes: getting critical mass (whatever that is for you) or at a product milestone that makes your venture fundable, starting to get revenues or cash-flow positive. When someone asks you, “What does this money get you?” they really want to know that it gets you to some amount of users, coverage of certain platforms, first enterprise customers, whatever it is. Just something more mission critical than “18 months.”

Notice that it’s not necessarily all the way to the exit strategy. I find this very refreshing, looking at some real next step, and going back to the foundation of metrics and milestones, trackability.

5) Specific value creation –The easiest way to show value creation is to say that each customer is worth X dollars in revenue. Pair that with the cost of customer acquisition and net worth; there’s your business. I don’t care if these are wild-ass guesses–at least make some attempt at showing that at customer N, your business is worth X.

That’s a very nice summary of “value creation.” Units times price.

What I like about this post is that it gets away from the standards I find myself listing too often: exit strategy, differentiation, growth potential, defensibility, management team and so on. This different way of looking at it seems very useful to me.

I was surprised to read that a Palo Alto, Calif., venture capital firm had invested in an art business. And perhaps it’s the surprise element that has this one featured recently in Business Week and The New York Times. It’s an $825,000 VC investment in Jen Bekman Projects, an art gallery and online art business.

At first glance, this seems like an exception to the general rules. Venture capital generally wants innovative and high-tech businesses that have a reasonable chance at high growth leading to a lucrative exit three to five years from now. How does an art business fit into that?

Dig deeper, and you see that it’s not that much of a surprise. This is not just art, it’s a new way to gather and market art online. The Times story says:

The popularity and reputation of the site, which has won fans for its affordable collections of quirky work, were enough to grab the attention of Tony Conrad, a partner at True Ventures, which led the financing.

And the Business Week story refers to a “disruptive business model” (emphasis is mine):

Cash flow positive. Growing revenue. Disruptive business model. If you’ve got those three things in place, it may not matter whether you’re the kind of business VCs typically fund.

Ironically, “cash flow positive” and “growing revenue” aren’t always qualities that investors want in a startup, because they can create a company that doesn’t need to go public or get acquired later on. Investors don’t want to get trapped in a minority share of a healthy company that never generates liquidity. They have to be able to sell their share within a few years, which means either a public offering or acquisition by a larger company. And a cash-flow-positive growing company doesn’t automatically do that.

So without actually knowing her or the background, I’d be willing to bet that Jen Bekman, the founder, is personally impressive, dedicated to growth, and that she has a real exit strategy. In the background, she’s working with well-known angel investors. Her capital structure probably gives the angels who invested early some control, too, which also increases the odds of a successful exit later on.

Congratulations to Bekman. And exception or general rule or both, it’s nice to see a bootstrapped company make it to a big-time investment, and positive cash flow show up as one of its better qualities.

(Image: from Jen Bekman Project. Chad Hagen’s “Nonsensical Infographic No. 2?. Linked here from NYTimes.)

I first noticed the so-called home office market back in the middle 1980s, when I did my business from a home office (so perhaps my attention wasn’t entirely by coincidence). I was consulting for a living in those days, doing planning and related research mostly for high-tech companies. I was also writing a monthly column in Business Software magazine. And one of the markets most of my clients wanted to reach was what they called the home office.

The problem, however, was that the people who ran their home office businesses didn’t really make a market. They were out there diffused in the world, without an identity, without much in common with each other and without product identity.

What did a home office need that was different from what small businesses needed? What did a home office buy, different from a general small business? It was hard to tell. In comparison, the mobile travelers needed some predictable items and read predictable magazines. So did the students, the engineers and so on. But not home office businesses. Or so it seemed back then.

Earlier this week Steve King of Emergent Research tipped me off to new research about home-based businesses that adds a new angle on the lure of the pot of gold. In his post “The Rise of the Homepreneur,” he offers real numbers from a new report based on data from the Network Solutions Small Business Success Index. The report is available here. And some of the key findings are:

• Home businesses employ more than 13 million people.
• Nearly 6.6 million home businesses generate at least 50 percent of the owner’s household income
• 35 percent of home businesses generate $125,000-plus in revenue and 8 percent more than $500,000.

So with new data from a new angle, it’s not that home office businesses are necessarily a market; it’s that they are a lot of people doing business, making money and doing (I hope) what suits them. And a reminder, as well, that “home office business” doesn’t mean inconsequential; the millions of businesses in this study are supporting people, employing people and generating real money.

And if you dig into the study, they are being taken seriously by customers and clients. And they offer lower-cost startup alternatives, too.

Now where was that rainbow?

1. Strengths and Weaknesses

Strategy is about focusing on strengths. It’s about managing resources. It’s about working around the side to minimize the impact of weaknesses. And one of the hardest parts of strategy is having the discipline to say no. Focus on what’s most important.

2. The Key to Failure

My favorite quote on strategy is from Bill Cosby:

“I don’t know the key to success, but the key to failure is trying to please everybody.”

3. About Consistency

Better a mediocre strategy well-implemented over a longer period of time than a series of brilliant strategies each implemented over a short term, contradicting each other.

4. When to Stay the Course and When to Change It

And then there’s that old country song, The Gambler, that makes life into a card game, in which the secret is knowing when to hold them and when to fold them. With strategy, that comes up a lot. When things aren’t going right, do we abandon the strategy? Or do we stick to it longer because it needs more time?

There’s no simple rule for this. That’s why people run strategies, not algorithms. But it helps to look hard at whether the strategy has been well-implemented (hint: that’s why I like business planning) and whether assumptions have changed.

5. In a Nutshell

A good friend and client, Hector Saldana, who had a brilliant career with Apple Computer from 1982 to 1994, once said to me: “Management is nothing more or less than knowing when and how to say no.” So is strategy.

(Photo credit: Worktyo Pawel/Shutterstock)

Funny, everybody in government is in favor of small business. Words and phrases like “job creation” get used so much they’re diluted of all meaning.

Meanwhile, back in the real world, you and I are getting into the office early with a large cup of coffee every day, answering phone calls, following up on projects, and while these issues affect us in the long term, we have too much short term–and too much business-specific work–to allow us time to even look into it.

So I was browsing NYTimes.com online Sunday when I caught Robb Mandelbaum’s piece called Obama Talks Up Small Business, Again on his You’re the Boss blog. It seems like a decent piece of journalism, summing up the latest small-business talk from the White House. What struck me about it, though, was not the content but how much I find myself agreeing with this comment, from someone who uses only his first name (Doug) and says he’s a small-business owner. He said:

• This is not a Democrat vs. Republican issue. I am WEARY of the fighting–neither party shows it cares about anything but winning and staying in power (or regaining it.).
• As soon as a person brings up Pelosi or Reid or Obama or Limbaugh or Beck or Cheney–that person LOSES the argument by showing they are not an independent thinker but a follower of the hamster wheel of politics that keeps spinning, keeps getting you worked up emotionally, but never gets things done.
• Give American small-business owners the freedom to be entrepreneurs and they will supply America with innovation, jobs and new tax revenue.

I agree.

(Photo credit: Marynchenko Oleksandr/Shutterstock)

For idea leadership in this realm, look to Seth Godin: his books and his blog. He’s redefining advertising as “shouting.” And he looks to a new kind of marketing built on being remarkable, in a very literal sense of the word: remarkable, as in something that people will talk about. And for practical how-to leadership, I recommend John Jantsch, Duct Tape Marketing founder, redefining marketing as getting people to know, like and trust you.

And for actually working rapidly changing marketing assumptions into your own business plan, frankly, it’s hard these days. It’s complicated because the landscape is built on sand mines; it crumbles fast.

I recommend you use a methodology somewhat akin to following the money for the financial portions of your plan. But for the marketing portions, you follow the attention. You could call that eyeballs (a popular web term), or mindshare, if you prefer.

Start with attention. Ask yourself what makes people aware of a need, a problem or a want that you solve. You could call that an itch, because need is misleading: People buy a lot of goods and services they don’t really need. So you want to understand what gives people the itch that leads to you when they scratch it. And then you understand how to scratch the itch: Where do they look for solutions? Is it habit, the shop next door? Do they look in some repository in their mind or memory, like some ad they’ve got stored in the back of their mind? Or do they open a web page and do a Google or some other search?

I read about an IBM study called The end of advertising as we know it on Michael Glass’ Fuel Lines advertising blog. This is very interesting stuff. He quotes the IBM study:

Imagine an advertising world where … spending on interactive, one-to-one advertising formats surpasses traditional, one-to-many advertising vehicles, and a significant share of ad space is sold through auctions and exchanges. Advertisers know who viewed and acted on an ad and pay based on real impact rather than estimated “impressions.” Consumers self-select which ads they watch and share preferred ads with peers. User-generated advertising is as prevalent (and appealing) as agency-created spots.

And Glass adds his own commentary, from his advertising professional’s point of view.

There is no question that the future of advertising will look radically different from its past. The push for control of attention, creativity, measurements and inventory will reshape the advertising value chain and shift the balance of power.

And what can you do about it? Follow the attention. Follow the eyeballs.