4.4 Planning for Internet SMEs
There is no one correct way of writing a business plan, but a small ebusiness will generally go through most or all of the steps below.
1. Check that their business will convert to the Internet environment.
2. Avoid launching themselves at the wrong time by researching their market sector carefully, both current trading conditions and future indications.
3. Be clear on their revenue model and what they are selling: physical goods, software/content, services or selling for others.
4. Establish their marketing approach. There are many that work on the Internet, and many that do not. Even the successful have their pros and cons, and their differing ranges of costs.
5. While there's always room for new ideas, some approaches have been shown to fail. The reasons were obvious with hindsight, but companies would do well to consider the case studies of similar enterprises.
6. Crucial to success are sales. What sort of traffic can be expected, and what percentage will convert into purchases?
7. Proceed cautiously by testing the business model before proceeding too far.
8. Model the cash flows, break-even points, R.O.I., etc. under the assumptions indicated by research. The modeling needs to be as penetrating and objective as possible, as potential backers certainly will be.
9. Look at their business model in more detail, identifying areas of challenge and opportunity. Investors will want to see these areas are covered, that they feature in the unique selling proposition, and steer clear of common pitfalls.
10. View their plan from the perspectives of the funding institutions, which focus on certain requirements. Redraft the plan accordingly.
Types of Business
Many types of small Internet business exist: some broad categories:
1. Online representation of an established business: sales still largely via traditional outlets.
2. Responsible online business built from scratch.
3. Opportunistic ventures, staying one step ahead of the competition and/or legal problems.
4. Unusual hobbyist or novelty site, one that may or may not 'catch on'.
5. Visionary software or service company.
All five can be very profitable, but the planning approaches are quite different.
Primary concerns are enhancing brand identity and strengthening customer relations. The site will supplement and extend current marketing efforts, but not necessarily be a great money spinner in itself. The company will want to:
1. Research websites in their market sector.
2. Identify web-build companies.
3. Have a website built that stresses the product quality and service aspects:
a. company history and policies.
b. product specifications.
c. location, opening hours, telephone numbers and personnel of retail outlets.
d. complaints and returns procedures.
e. technical support: handy hints, white papers, helpline.
The site will pay for itself by promoting offline sales and reducing returns. It may be later that online purchase facilities are added, probably a high-security, database-supported operation. Promotion through the natural or pay-per-click search engines will not be important, but URLs and email addresses will appear in stores, letterhead and magazine ads.
New Online Business
The Internet is crowded with online businesses, and new ones appear in dizzying numbers every day. Research and planning will be very important, and promotion through the natural or pay-per-click search engines consume a large part of the marketing budget.
Opportunistic businesses are continually looking for the quick buck, exploiting market opportunities as openings appear, and moving on rapidly when the competition catches up. They come into their own in these areas:
2. Selling advertising.
3. Marketing gurus, with ebooks, conferences, and specially-sponsored software. Outstanding reputations may (gurus) or may not (affiliates) be essential, and individuals sometimes cross the line of accepted business practices, occasionally of the law itself. Many are innovators, however, the Internet would be a duller place without them. In these approaches there is generally a need to:
1. Develop extensive business contacts through conference appearances, newsletters and articles in the ecommerce press.
2. Continually network with other entrepreneurs and young business leaders.
3. Be in the swim of new ideas: hang about newsgroups, forums, local business groups.
4. Develop a technical knowledge of Internet possibilities (either from a programming background, or by forming partnerships with technical staff) so that innovative websites can be up and earning in a matter of days.
5. Employ an accountant to set up multiple companies, legal but with only minimal financial responsibilities.
6. Locate seed capital to tide them over the flat patches: traditional sources won't be forthcoming.
Unusual Hobbyist or Novelty Site
A small number of Internet businesses defy reason. From an orthodox business point of view, they shouldn't exist, but they do exist, and sometimes make extraordinarily amounts of money. Examples include: furniture arranging, autographs, soap manufacture, hand-crafted blankets, and so forth. For these, there is little point in detailed planning until there is proof of concept, i.e. until it's clear there is some merit in the idea. Proper data will not be available for a business plan if the concept is really novel, and the local bank manager won't give it the time of day. The steps will be to:
1. Make a simple plan of a page or two.
2. Try selling the product on eBay or other auction site.
3. Set up a cheap site with an all-in ecommerce hosting service.
4. Continually test to establish pricing, customer preferences and best sales sales copy.
5. Armed with hard data, make a detailed plan to exploit the market opening before competitors close in.
Visionary Software or Service Company
Once the darlings of the media, i.e. before the dotcom crash, innovative companies identify a need for something not immediately apparent. Many difficulties lie in their way, not least changing market views, but their key difficulty is funding. Strong in technical expertise and selling skills, they need the time to bring their ideas to fruition, without selling out prematurely to venture capitalists or large software houses.
Financial modeling goes beyond providing financial statements in the form of balance sheet, profit and loss account, break-even price, return on investment, time to profitability, and the like. It means wholly understanding the business in financial terms, providing explanations to such questions as:
Nature of the Business
1. What are you selling?
2. How is it going to make money, precisely?
1. Startup date?
2. Projected turnover and profit? By when?
3. Overall goals and objectives?
1. How are your products or services better/cheaper/more attractive?
2. How will you advertise, on and off-line?
3. What's your pricing policy?
4. What's the competition, and how will you cope?
5. What are the prospects in your market sector?
1. Who's supplying the startup or seed capital?
2. How long before the business is profitable?
3. What's the break-even point in services or units sold?
4. What's the return on capital, and is this higher than simply investing the money somewhere?
5. For the first 3 years
a. what are the projected cash flows?
b. income statements?
c. balance sheets?
1. How many hours per month will it take to:
a. Fulfill orders?
b. Update content?
c. Market the site?
d. Handle the accounts?
e. Produce reports?
1. Who's doing this work, and at what cost?
2. What staff need to be recruited, and when?
Finalizing the Plan
Most ebusinesses fail because:
1. The business plan is not properly researched and implemented,
2. Ecommerce is not sufficiently integrated with current business, and/or
3. Proper advice remains unsought — not for reasons of cost or limited time, but because management is locked into a 'do or die' attitude to its (wrong) plan.
The business plan has to be sound because:
1. You'll not manage effectively without targets and strategies clearly set out.
2. Funding agencies won't invest without having detailed plans to examine.
3. A good plan ensures that the vital questions are properly addressed.
4. The plan forms the basis of the records you'll have to submit to the tax authorities.
A good business plan is one that works, and therefore has to be specific, simple, realistic and complete. How complete? To raise venture capital, or secure a large private placing, you'll need to cover all aspects at length, backed up by documented research. If, on the other hand, yours is a part-time business needing no additional finance, then the plan can be a few pages. But one thing is essential. A business plan is a support and guide in the years ahead — which means it absolutely has to be clearly thought-out and honest. Skimp or kid yourself, and grief will surely follow.
Writing the Plan
Who's going to write the business plan? These are your options:
1. Write it yourself, researching information from the Internet and public/business libraries. Use a simple spreadsheet like Microsoft's Excel for the cash-flows
2. Do the research yourself, but employ a software package to set out the document in a more professional manner.
3. Apply to US and UK Government bodies, who provide free business guidance.
4. Contact your local university/business school and see if MBA students are prepared to research and write your plan. You'll need to come to some arrangement regarding fees and costs, but the process will be cheaper than employing a professional company, and give you fuller control.
5. Look in your local business directory to find a firm of professionals. From $3,000 to $10,000 is the going rate, but this may be money well spent to have the job done properly and inspire confidence in potential investors.
You can build a ecommerce site at practically no cost at all, given ample time and some HTML/programming expertise, but you should remember that:
1. It is difficult to produce a really professional-looking site with freeware HTML authoring packages and the graphics tools provided 'free' with Windows.
2. You'll probably not get decent traffic nowadays without using pay-per-click services.
3. Most ecommerce merchants strive for a balance between outsourcing and company time.
A popular approach among SMEs is to: spend nothing but their own time on ecommerce conception, business plan, market research and choice of payment system, but to outsource:
1. Web build ($',000),
2. Hosting ($'00),
3. Search engine optimization ($',000) and
4. Press releases ($'00).
More ambitious companies will: spend nothing but their own time on ecommerce conception and business plan, but outsource:
1. Market research ($'000),
2. Site build and online payment integration ($'0,000),
3. Acquiring a merchant account ($'00),
4. Search engine optimization ($'000),
5. General marketing ($'0,000) and
6. Running the site (webmaster or site build company: $'0,000/year).
Established corporations, and companies setting up major ecommerce sites, ecommerce portals, e-auctions and e-gambling sites will have costs along these lines:
1. Consultants to appraise ecommerce conceptions ($'0,000),
2. Market research ($'00,000),
3. Business planning($'000),
4. Site build and online payment integration ($'00,000),
5. Search engine optimization ($'0,000),
6. General marketing ($'00,000) and
7. Server/website staffing ($'00,000/year).
Some Final Suggestions
1. Business planning programs are convenient, and will give your presentation a professional finish, but don't overuse them. Investors are quick to spot 'computer generated' figures.
2. A simple spreadsheet program will allow you to model a wide range of scenarios. You can present the key results in a final plan.
3. Give a broad overview, and then back the figures with supplementary calculations. Add supporting explanations.
4. Don't hide the vulnerabilities of your plan. Bankers are trained to probe, and expect to see the difficulties squarely faced, with practical solutions.
5. Run off a fresh copy for each presentation. You don't want a tatty copy suggesting that this is your fiftieth presentation (though it may well be).
Many businesses start small with no additional funding required, and these are often the safest — no meddling from outside parties, no loans or overdrafts to be suddenly called in. But that's hardly practicable where new market opportunities have to be seized, and staff, premises and marketing budgets found quickly. In this order, Internet businesses are most frequently funded by:
Seed Capital from Friends and Family
A popular way, but you will have to ensure that your business plan specifies who is running the company, and what financial rewards investors can expect.
Angels are individuals who provide seed money to companies who are starting out or in their early years of operation. Small sums are involved, generally under $100,000, but investors do expect a good return. You'll need a sound business plan, persistence in securing the right investors (though there are many network agencies) and patience in explaining your business over and over again. Make sure that expectations are covered by agreements, and do your homework on investors if you can. The best bring enthusiasm, contacts, experience and business savvy to your operation.
You sell shares in your company to private individuals. You'll have to prepare a good business plan that promises vigorous growth, get a lawyer to prepare the paperwork and avoid the attentions of competitors. Best suited to companies that have been established for a year or two. Funding is more secure than a bank loan or overdraft, but larger shareholders will expect a seat on the board, though probably in a non-executive role. Backgrounds and personal strengths of your team members will certainly be assessed.
Mergers and Acquisitions
Many Internet companies merge with others, or are taken over in the first two years of trading. For entrepreneurs wanting a quick return that may well be a happy outcome, but most companies find the adjustment difficult. Management is no longer in their hands, and financial rewards are very much curtailed. Over-optimistic plans and under-funding were usually the cause, but what can be done now, when funds are urgently required? Size up the opportunities. Be proactive and approach strategic partners while there's time. Remember that deals take months to finalize, and don't accept the first offer. Find a company whose abilities complement yours, so that the new entity has combined strengths. Agree a common policy. Have a buyout clause, and procedures to govern management or policy disagreements. Scrutinize the merger agreement, obtaining legal opinion experienced in this field.
Also called vulture capitalists, these institutions are looking to invest in fast-growing, mid-stage and highly profitable companies. They will fund heavily, but only where explosive growth seems likely, and where they can largely take over the management and marketing of the product (services are less popular). Venture capitalists tend to work to well-tried formulas, and understand that they are investing large sums from wealthy individuals and institutions who expect fast results. Broad aims are important, as investors generally make their money when your company goes public.
Bank Loans and Overdrafts
If banks cannot see an established, well-run business, with every likelihood of loans being repaid on schedule, they will not lend, or lend only at exorbitant rates against collateral of home or other assets. You need to think very carefully before taking this option. Feed very negative figures into your projections, and be sure you can repay, whatever happens.
Generally, investors are looking for:
1. A sound business idea capable of rapid exploitation.
2. Evidence that the idea has been thoroughly researched, and ways found to cope with possible difficulties.
3. A business plan covering all aspects, long-term aims outlined and the first three years treated in detail.
4. Energy, enthusiasm and commitment from the principle officers.
5. An excellent track record in one or more of the management team.
6. A business actually started rather than simply 'a good idea'.
1. However presented, a business plan is only as good as the experience, research and thought that went into it.
2. Internet businesses are no different from other businesses, and fail for the same reasons: under-funding, over-optimistic hopes, insufficiently-researched markets, poor implementation and/or financial control.
3. You'll be safer adopting a tried and tested ebusiness model — but check that it really does work: business information is notoriously unreliable.
4. Expect your site to take at least a year to generate a proper stream of visitors, and more years to start paying back the investment.
5. Take the planning as far as you can, but don't substitute planning for action. You can only really see if a plan works by trying it out. But go cautiously, and make sure the 'worst case' scenario really is the worst case.
1. How does moving an existing business online differ from starting one from scratch?
2. Outline four groups of ecommerce start-ups.
3. What should a business plan cover, and why?
4. Describe possible sources of capital, their advantages and disadvantages.
5. How can you get accurate figures for web-build and other costs?