CS73N Note on Business Plans
Created April 2005 by Gio Wiederhold, renamed 7 April 2006, updated 14,16 April 2006, material added 1 May 2006, Oct 2007 needs cleanup for consistency.
Also see Notes 07 on Business Plans , started by Avron Barr, 2 May 2006
Business Plans
Formally, a business plan is a document to present to investors showing why they should spend money on you and your ideas. For the class we just want to see what you expect the costs and benefits to be.
To bring a common metric into a business plan, money is used. Costs of your time, resources, as computers, other people's time, etc. needed are on one side; benefits appear on the other side. If the benefits are societal, then you still want to able to compare with other means that can achieve those benefits.
Since your project or business should be sustainable over a long term, you will need to estimate cost and benefits for many years (or quarters) into the future.
Business discussion
First you have to describe your business:
What does it provide?
Is it for profit? By subscription, pay-per-use, sales-commissions, advertising?
If not who will pay for it? A sponsor, donations, you yourself -- your time?
Location of a business? Consider costs, shipping, credibility, returns
What's the equivalent of location on the web? Virtual communities: sufferers from arthritis, multiuser game players. Or a credible institution, like a Stanford environmental group.
Will you sell tangibles (require shipping), or intangibles?
Cost of shipping large amounts of tangibles has gone down, due to containerization. Made it more difficult for small enterprises.
Income sources
If it is for a public benefit, is there already an organization that serves the area?
If it is a business: Will it derive income from
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Sales of information, by use or by subscription?
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Sales of goods, by commission or obtain direct support from the business?
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Derive income from advertising on the site?
Will advertising conflict, dilute, reduce trust in what you present?
Advertising is a huge fraction of business outlays, in magnitude comparable to what is spent on the goods themselves. An estimate is that world wide $450 billion is spent on advertising, of which $24B went to Internet advertising ["The Next Big Thing"; The Economist, 6 Oct. 2007]. But there is much competition, and advertising on mobile devices is growing fast.
Specifics of a Business Plan
For every year (or every quarter) you list the costs and the benefits
Costs:
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Your time, namely hours and cost per hour. What is your time worth? Is a student's time free or cheap? How much is your tuition, living expenses, etc., that allow you to attend Stanford? How much time should you spend studying? The quotient gives a lower bound on what your time is worth.
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The time of others helping you, same calculation, or the cost of hired help.
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Computer cost, Internet connection cost. If it's a commercial venture, you can't expect Stanford to pay for computers and Internet connections.
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Do you have to buy anything?
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If you sell tangibles, then there is a cost-of-goods being sold.
Note that all systems need maintenance, since stuff gets out of date - even the knowledge embodied in software. A general estimate is that it costs at least 15% / year of the original cost to maintain stuff.
Revenues
Income, as discussed above, or simply what a sponsor would have to pay to recover the total cost.
Can your web page be sponsored?
If you are selling stuff: are your goods fungible or unique?
How will you set the price?
Will you have to collect money from customers – How will the income be collected? There will be collection cost and trust issues. Would PayPal work for you – see Business Week, 23 May 2005, p.10
Consider
Consider return policies and methods.
You will have to deal with customer problems when customers don't like what they got.
Business Models
For most ventures, initial years or quarters show a loss, and eventually, at the break-even point a profit. The initial profit will first have to pay the debts that have accrued during the period you made a loss. And then you can accumulate new capital, pay back the stockholders, or invest it in a new venture.
Graphing what happens for each time period is instructive:
- total costs
- total revenues
- net profit or loss
- debt accrued each period or capital accumulated.
Even if what you are doing is not intended to be for profit, being able to show what happens will be instructive for you and possible sponsors.
The result should appear on one of your web pages, with a discussion on why your project makes econmic sense.
Sub-elements specific for software/intangibles
- Software is slithery, it requires continuous updating to remain relevant, but when it is updated it actually stays valuable. Assume new versions every 1.5 years.
- Because of the updates software grows steadily, there is only minor deletion of code.
- Price you can get is stable, because functionality stays constant and competition
- Sales curves are best modeled by Erlang curves (see spreadsheet). Look like normal curve, but with a definite begin point and stretched into the future.
- Combining that gives the income
- Have to pay though for all the software updating, i.e., maintenance, goes up as software gets bigger. Stop the product development when it becomes more than the income.
- Discount the future income, about 15% for SW businesses (beta 1.25).
- When you know today's value, you can determine how much you can afford to spend on developing the first version.
Material on my work-in-progress webpages:
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- Paper on Software Worth
- Spreadsheet to play around with
Below, you will find a powerpoint presentation by Ann Winblad, an influential venture capitalist, about how to write a fundable business plan. This presentation was given at BASES Startup School, Spring 2006.
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