To plan or not to plan: what a question

The concept of a business plan has divided opinions many times over the years. There are some people, mainly business schools, who swear by one and say how it could mean the difference between success and failure, while there are others, mainly successful entrepreneurs who have made it without a business plan, who say it's a waste of time. In fact a study by Babson College in the US, have found that there is no correlation between the success of a firm and it's production of a business plan.

It is thought that, on average, a business plan takes 250 hours to write. But why do people bother?

Well the purpose of a business plan is to understand and assess the opportunity. For an entrepreneur the opportunity, the match of a need and solution as perceived by the entrepreneur, is most crucial thing in a new venture and therefore needs to be thoroughly analysed to make sure that it is an opportunity worth pursuing. A business plan does just this and as some people say "it's better to make mistakes on paper!"
The business plan also provides strategic goals for the future. It gives the entrepreneur some sort of direction. That direction might change but at least it sets you off in the general direction.
And finally the number one purpose of a business plan is to give to investors to raise money. You won't be able to get venture funding without one so if you need to then go write one.

If you do end up writing one then you need to make sure your plan has the following characteristics:

1. Memorable (for the right reasons!)
2. Clear & Concise (well-structured)
3. Objective (Accurate, positive and critical)
4. Consistent (style and depth)
5. Simple (non technical)

So what about the other side of the arguement. Other's say, perhaps rightly so, that writing a business plan for 250hrs is a complete waste of time. Better to go out on the street and learn from your potential customers. Doing is better than planning.
Other's say that time is an issue. Opportunities are rare and they don't last very long. While you are planning, someone else is doing and may reach the market before you do.
Finally a lot of people say that in this dynamic environment, as soon as you press print on your computer, your business plan is already out of date.

In a business school you may get an A for a good business plan, but in the business world you only get an A for Achievement. So unless you are definitely going for venture capital, I believe it is best to just go out and do it.

The pursuit of opportunity without regards to resources currently owned

Entrepreneurs live off opportunity. Real entrepreneurs spend their lives looking for the perfect opportunity to exploit, and even when they have found it some continue to keep looking for more. An opportunity can be defined as "the match of need and solution as perceived by the entrepreneur". In order to exploit an opportunity the entrepreneur needs to utilise resources in order to make the opportunity profitable.

In particular the resources that the entrepreneur requires are the types of capital required:

1. Financial - e.g. equity
2. Human - e.g. skill and experience
3. Intellectual - e.g. IPR
4. Physical - e.g. land
5. Social - e.g. people

As the title suggests, these types of capital are vital to turn an opportunity profitable, however you do not need to own all of them. All you need is to have access to them. For instance, if you're a manufactring start-up. You don't need to own a factory. You can just rent one. Better yet just borrow the machinery when you need it.
The method of starting up a venture with as little capital/help as possible is known as bootstrapping. In bootstrapping the most important capital is an entrepreneur's social capital as this provides the social network, which allows access to the other types of capital.

I like to use the example of Hot or Not as a start-up, which had no capital to start up. Hot or Not is a website where you rate pics of users of whether they are Hot or Not. When it first was invented by James Hong, he hosted the website on his university's server, without them knowing. Within a week the site was getting 2million views a day and he was in danger of getting found out. He needed to find someone to host his website, which usually costs a lot of money. To get round this he contacted a hosting website and negotiated a deal whereby the website would host Hot or Not for free in return for advertising on Hot or Not. (the web server here is an example of physical capital that was required)
Hot or Not, which eventually turned into a dating site, was sold for $20million in 2008.

Appropriability. Making money from your innovations

When defining your business strategy there are two main factors that influence strategy: Appropriabiltiy and Complementary Assets. Appropriability is the ability to generate cash from your innovations whereas complementary assets are the resources and capabilities required to make the business work.

One needs to determine the type of appropriability regime that you are have whether it be tight or weak. Tight appropriability implies strong protects, such as patents or tacit knowledge. Weak appropriability regimes are when protection is less strong such as when it is easy to imitate or engineer around a design. Perhaps it is pre-dominant design therefore the patent you have on the design is redeemed as useless.

There are two types of complementary assets: generic and specialised. Generic complementary assets are those which everyone has access to and therefore confer no real significant advantage to the company. Specialised assets however are a key source of differentiation.

The Teece model uses these factors to determines who profits from innovation and the strategy to take should you find yourself in one of these positions.

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Landing your dream employee

So once you have gone through the hassle of finding the perfect employee who has passed all the Eligibility and Suitability tests you throw at them (see earlier post); the work doesn't stop there. If you find them, rather than the other way round, then it is likely that you have to persuade them to leave their nice comfortable job, and join your risky new venture. On paper it doesn't seem like an easy task.

For the potential employee, there are many things to take into consideration. The first of which is Family Responsibilities. If the person you have found is some hot-shot wonder-kid, then this shouldn't really be a concern. However it is likely that you were looking for someone with some experience. And with experience usually comes a family, who play a major role in decision making.

As I said previously, the employee may already have a job to which he is committed (career commitment) and is financially committed. A lot also attributes to a person's attitude towards uncertainty as new ventures are very uncertain. This also couples with the person's fear of failure and financial loss as both factors are distinct possibilities.

So to get your man (or women), one needs to offer substantial material rewards including equity, salary, bonuses and the potential to gain new "toys".
But it is often the non-material rewards which are more powerful. After all, someone can easily get the above material rewards working for a major corporation and play the stock market to gain equity in a venture.
The non-material rewards include the flexibility and sense of personal achievement that are associated with new ventures. The chance of recognition, prestige and power are big drivers for new venture creation. And finally a lot of people see new ventures as a fun challenge.

So the challenge is to make the rewards worth it for the risk of barriers to people joining the team. Or at least minimise these risks. One potential way is to allow the employee to work on the new venture part-time. This immediately removes all the potential barriers to them joining the company and they can join the venture full time when success is more certain.

Effectiveness of the WTO

It is easy to criticise the WTO based on high profile stories but the WTO, and it's predessor the GATT, has done a lot of good for the global economy since its inception (GATT - 1947, WTO - 1995).

The GATT was set up with the objective of "to promote international trade by lowering 3 main barriers to trade (tariffs, export subsidies, domestic support)". In that sense it has done just that. It is estimated that 97% of international trade is represented by the WTO through it's 153 members. Tariffs have estimated to have decreased from 40% to 5%. And that 9/10 disputes have been settled constructively.

But it has been argued that the 9/10 disputes that have been settled are "easy" disputes and that the tariffs that are remaining are on the crucial industries that would really make a difference, such as food and automobiles.

The latest rounds of talks, the Doha Development Round was initiated in 2001 and has repeatedly stalled. The main points of contention have been agriculture subsidies to the US and EU, which developing countries want reduced. Lower prices in developed countries have increased imports in developing countries where local farmers have been impact.
On the other side, US and EU have blamed China and India for being overprotective and not opening up their markets to industries such as food and automobiles.

The WTO has also been widely publicised for failing to settle the dispute between Airbus and Boeing in the commercial aviation sector. Airbus being accused of receiving "launch aid" from EU governments, which loans to Airbus with effectively zero interest rates. Boeing being accused of receiving hidden subsidies through development contracts. Both have been found guilty by the WTO last year, but the situation is far from resolved as appeals and counter-arguments will make sure that this dispute will not end soon.
(in my opinion, it is in the best interest for Boeing and Airbus to resolve this dispute swiftly. They face increased competition from Bombadier and COMAC who have recently announced an agreement to work together.)
(Also COMAC is a state-owned company, while the state also owns several banks. therefore it is likely that COMAC will be funded via the government as well. I think the best thing to do would be to agree on a interest rate for government loan to have transparency on the matter)

The rise of regional trade agreements, which seem to be a lot more dispute free than multi-lateral agreements. RTAs are agreed on more frequently and can be tailored to suit those countries involved. Trade agreements between trade blocs can be made to other countries, which was the case with ASEAN making trade agreements with India and China respectively at the start of 2010.

While there have been some high profile disputes, and the ongoing stalling of the Doha Round, I do think the WTO is a beneficial organisation. The theory of Free trade is a positive one, as it does stimulate economic growth and is beneficial to consumers. Not only does it help economic factors but it also helps politically, as it promotes peace. As such i think the future of the WTO is fairly certain. However the future of the Doha Round is probably less so. Having gone 10 years without any substantial breakthrough in the dispute over agricultural subsidies, i think the WTO may have to say that the targets were ambitious and come to a compromise so that the round can end and they discuss other disputes. I don't think the credibility of the WTO will suffer as a result.

Picking the your dream team

Every start-up needs a good team. It's one of the first things Venture Capital look at and a common cliché is that VC's invest in teams, not ideas. While I don't 100% believe that you require a proven team, after all Google and Youtube were not proven teams when they got venture vending. Nevertheless, you cannot run a start-up by yourself and picking the right people to join you is a decision to not be taken lightly.

I think the first thing to consider is what you are looking for and where to find it. Look for the gaps in the team. Don't just hire the best person from the best company you can think off. To use a football analogy, if you were to do this strategy you would go to Real Madrid to hire Cristiano Ronaldo then Barcelona to hire Lionel Messi. For starters you have just hired two very similar people with roughly the same set of skills. But what if you needed a leader? Then the best place to go is to go to Chelsea and hire John Terry (England Captain).

So for instance if your a tech company, hiring the vice-president of technology from Microsoft might sound like a no-brainer but the company might already all the technological knowledge it needs and just require marketing and sales experience. In addition, a vice-president from Microsoft might have no idea what it is like to work for a start-up. They are 2 completely different environments and they might not be well suited to it.

From Guy Kawasaki, the Art of the Start, it is also important to hire people that are better than yourself. "A player's should hire A+ players". If you start hiring people who are worse than you then it might start a downward spiral until the company is full of Z players. 

So once a potential candidate has been identified, one needs to assess the candidate based on 3 key things on whether they are suited to join the team:

1. Psychological state - Will they do the job
2. Ability - Can they do the job
3. Personality - Will they fit in

The eligibility criteria (Ability) shows whether the person can do the job. Things to look for include:

• Relevant qualifications, functional expertise and skills. 
• Prior entrepreneurial experience, regardless of whether it ended in success or failure. 
• Contribution to the Capital mix
• connections up, down and across the value chain

Next is the Suitability criteria (Psychological state, Personality) which shows whether the will do the job and whether they will fit into the team. The type of things to consider involve:

• Shared vision, values, beliefs and goals
• Personal fit with team
• Mutual trust
• Versatility & Flexibility
• Ability to learn and adapt

Failure to not consider eligibility does not occur too often as business tend to not overlook those factors. However it can arise if hiring friends or family when ability isn't the primary factor for hire. Failure to assess eligibility correctly can have drastic effects as it may result in technical and functional incompetence.

Suitability criteria are much harder to assess and therefore are often not considered as vigorously as eligibility criteria. However they can have just as a drastic effect on the performance of the new venture. If the team has too many different personalities that clash with one another, then it can be very counter-productive, and motivation and commitment may suffer. Likewise if team members have different psychological states then this could lead to many conflicts.

Therefore both eligibility and suitability should be assessed when picking new team members.

Should a company always look to VC for funding

Probably the most common association with a start-up is Venture Capital. All start-ups require some form of financial input in order to get off the ground but Venture Capital is not the only or always the right option for start-ups.
There are many things that a start-up must consider before choosing what they of capital to pursue:

1. Type of business
2. Attitude towards growth, ownership and control
3. Stage of development of business
4. Risks and return
5. Burn rate
6. Bargaining power

I think the first question to ask yourself really is whether you need funding at all? This technique is called bootstrapping, where a company starts up a business with as little external capital/help as possible. In effect it is beg, borrowing and salvaging as much as possible without the need of lots of cash. It is certainly a technique that is possible and there are lots of examples where companies have been successful using this technique.
For example, the hugely popular website Hot or Not is a prime example of a bootstrapping company. The website, founded by then student James Hong, was originally hosted on a university's server, with the university unaware of the fact. Within a week the site was getting 2 million views a day and James was in danger of being caught by the university. The site needed to be moved to an external server. Once James found a server to host his website, instead of paying a large fee, he negotiated a deal to host the website free in exchange for advertising the server on the website. Perfect example of bootstrapping on how you can get something for free, that you would otherwise would have to pay a large amount for.

If you do however require funding then you need to decide what the best funding option is. The first thing to ask is what type of business is your business. I think you need to ask yourself whether the business is viable or fundable. Any business that is fundable is viable, but any business that is viable is not necessarily fundable. Viable is the ability of a firm to make self-sustaining profits whereas fundable implies the ability to make substantial profits (10x profits). VC's only invest in fundable businesses so unless your business is fundable, not just viable, then don't bother.

Your attitude towards growth, ownership and control matter a lot. With VC's you might be restricted in the actions that you can take. To use a crude analogy, if you have 2 options to consider. One option to have a 100% chance of making £10million or a 20% chance of making £100million (expected return = £20million). A lot of people will be happy to take the 1st option but VC's will nearly always push you to go for the 2nd option.

The stage of development is very important. There are 4 broad phases to that the development process can be in. Initial idea, Feasibility, Prototyping and Commercialisation. VC's are unlikely to invest unless the idea has been proven in the market already with a prototype. You might be able to get Business Angel funding in the Feasibility stage onwards. The only capital you can get during the Initial Idea stage is your own cash or friends and family. And what about the bank? Only when you start producing cash flows in the commercialisation stage.

VC's only back high risk, high potential return start-ups. Obviously the less risk the better but high potential returns are correlated with high risk.

If you are desperate for cash then your bargaining power significantly decreases against providers of capital. Your room for negotiation almost disappears and be left with less equity than you probably deserve.