Although founders Keith Belling and Kara Nielsen can be proud to see Popchips generate $93.7 million in sales after just a few years, their company does face some for- midable challenges. For one thing, although $93 million is a lot of money, it represents roughly 0.1 percent of the
$90 billion global market for snacks. Among the hundreds of snack makers in the United States alone, Popchips is competing with such giants as PepsiCo’s Frito-Lay prod- ucts and Mondelez (formerly part of Kraft Foods). In fact, Kellogg’s has introduced Popcorn Chips, and Quaker has introduced its Popped brand of snacks. Consumers who are now snapping up Popchips as a way to enjoy crunchy snacks without the fat could abandon the brand as soon as someone new offers an alternative.
Belling tries to address the challenge by being person- ally engaged in helping to keep excitement for Popchips high. Five years after the start-up, Belling told a reporter that he personally answers 25 customer e-mails every
day. He does it because he wants to learn about what customers are thinking. It also puts him in a position to respond more dramatically than a big-company cus- tomer relations agent could ever do. In one case, after an enthusiastic New Yorker wrote in about her love of the product, Belling invited her to meet with a marketing manager—and sent her about 200 bags of Popchips for an event she was hosting.
To get out the message that his chips are not just low- fat but also delicious, Belling experiments with market- ing. As is often the case when people get creative, some of the ideas backfire. The most notable flop was Ashton Kutcher’s attempt to portray a Bollywood producer on a dating show, using an obviously fake Indian accent. After an uproar dominated by a blogger named Anil Dash, the company pulled the ad, and Keith Belling apologized on the company’s website. Reflecting on the incident later, Belling noted that the experience had taught him about
PROGRESS REPORTMANAGER’S BRIEFONWARD
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Increasing Your Chances of Success
Entrepreneurs need to think through their business idea carefully to help ensure its success. We discuss here the importance of good planning and a variety of resources.
Planning So you think you have identified a business opportunity. And you have the personal drive to make it a success. Now what? Where should you begin?
The Business Plan Your excitement and intuition may convince you that you are on to something. But they might not convince anyone else. You need more thorough planning and analysis. This effort will help convince other people to get on board and help you avoid costly mistakes.
The first formal planning step is to do an opportunity analysis. An opportunity analysis i ncludes a description of the good or service, an assessment of the opportu- nity, an assessment of the entrepreneur (you), a specification of activities and resources needed to translate your idea into a viable business, and your source(s) of capital. 86 Table 7.4 shows the questions you should answer in an opportunity analysis.
The opportunity analysis, or opportunity assessment plan, focuses on the oppor- tunity, not the entire venture. It provides the basis for making a decision on whether to act. Then the business plan describes all the elements involved in starting the new venture. 87 The business plan describes the venture and its market, strategies, and future directions. It often has functional plans for marketing, finance, manufacturing, and human resources.
Table 7.5 shows an outline for a typical business plan. The business plan (1) helps determine the viability of your enterprise, (2) guides you as you plan and organize, and (3) helps you obtain financing. It is read by potential investors, suppliers, customers, and others. Get help in writing up a sound plan!
LO 5
opportunity analysis A description of the good or service, an assessment of the opportunity, an assessment of the entrepreneur, specification of activities and resources needed to translate your idea into a viable business, and your source(s) of capital.
business plan
A formal planning step that focuses on the entire venture and describes all the elements involved in starting it.
the powerful impact that social media can make and had prompted the company to consider consumers’ percep- tions more carefully.
Popchips has forged ahead with other celebrity-based marketing efforts. It recently lined up singer Katy Perry to launch tortilla chips in four flavors (Nacho, Ranch, Salsa, and Chili Limón) in 2012 and Katy’s Kettle Corn in 2013. Even if consumers haven’t always appreciated
the taste of Popchips advertising, the company hopes they will continue to get excited about the taste of its popped snacks. 85
• What do you think are the most significant risks affect- ing Popchips?
• Do you think Popchips would be a good candidate for an initial public offering (IPO)? Why or why not?
What market need does my idea fill?
What personal observations have I experienced or recorded with regard to that market need?
What social condition underlies this market need?
What market research data can be marshaled to describe this market need?
What patents might be available to fulfill this need?
What competition exists in this market? How would I describe the behavior of this competition?
What does the international market look like?
What does the international competition look like?
Where is the money to be made in this activity?
TABLE 7.4
Opportunity Analysis
SOURCE: R. Hisrich and M. Peters, Entrepreneurship: Starting, Developing, and Managing a New Enterprise, p. 41. Copyright © 1998 by The McGraw-Hill Companies, Inc. Reprinted with permission.
Key Planning Elements A successful business needs enough cash to cover start- up expenses and keep the company running during slow periods. The initial bud- get should cover one-time costs, such as the fee to form a corporation, and ongoing expenses such as supplies and rent for the first few months. The company’s founders may start the business with their own money, or they may seek financing in the form I. EXECUTIVE SUMMARY
Description of the Business Concept and the Business
Opportunity and Strategy Target Market and Projections Competitive Advantages Costs
Sustainability The Team The Offering
II. THE INDUSTRY AND THE COMPANY AND ITS PRODUCT(S) OR SERVICE(S)
The Industry
The Company and the Concept The Product(s) or Service(s) Entry and Growth Strategy
III. MARKET RESEARCH AND ANALYSIS Customers
Market Size and Trends
Competition and Competitive Edges Estimated Market Share and Sales Ongoing Market Evaluation
IV. THE ECONOMICS OF THE BUSINESS Gross and Operating Margins
Profit Potential and Durability
Fixed, Variable, and Semivariable Costs Months to Breakeven
Months to Reach Positive Cash Flow V. MARKETING PLAN
Overall Marketing Strategy Pricing
Sales Tactics
Service and Warranty Policies Advertising and Promotion Distribution
VI. DESIGN AND DEVELOPMENT PLANS Development Status and Tasks Difficulties and Risks
Product Improvement and New Products Costs
Proprietary Issues
VII. MANUFACTURING AND OPERATIONS PLAN Operating Cycle
Geographical Location Facilities and Improvements Strategy and Plans
Regulatory and Legal Issues VIII. MANAGEMENT TEAM
Organization
Key Management Personnel
Management Compensation and Ownership Other Investors
Employment and Other Agreements and Stock Option and Bonus Plans
Board of Directors
Other Shareholders, Rights, and Restrictions Supporting Professional Advisers and Services IX. OVERALL SCHEDULE
X. CRITICAL RISKS, PROBLEMS, AND ASSUMPTIONS
XI. THE FINANCIAL PLAN
Actual Income Statements and Balance Sheets Pro Forma Income Statements
Pro Forma Balance Sheets Pro Forma Cash Flow Analysis Breakeven Chart and Calculation Cost Control
Highlights
XII. PROPOSED COMPANY OFFERING Desired Financing
Offering Capitalization Use of Funds Investor’s Return XIII. APPENDIXES
TABLE 7.5 Outline of a Business Plan
SOURCE: J. A. Timmons and S. Spinelli, Jr., New Venture Creation: Entrepreneurship for the 21st Century, 7th ed., 2007, p. 229. Copyright 2007 The McGraw-Hill Companies.
Reprinted with permission.
of debt (taking out a loan from family, friends, or a bank) or equity (taking money in exchange for an ownership share in the company). Typically, start-ups get most of their money from the owners, their families, and loans and credit lines from banks.
Other kinds of investors, such as venture capital firms, generate a lot of publicity for splashy deals but provide a very small share of start-up funds. 88
Under these circumstances, raising money to start a business can be one of the entrepreneur’s greatest challenges. When Eaton Corporation decided to close down the Massillon, Ohio, factory where Tony Lee worked, the ambitious foreman decided he would rather learn to run it than watch it go out of business. Lee studied business books at the library, wrote a detailed plan, and convinced a group of investors that his ideas could work; however, the investors insisted he also raise $25,000 of his own money and become a part-owner. Lee saved every penny he could, sold his motor- cycle, and took out a second mortgage on his house. Since then, he has rebuilt the manufacturing company, now called Ring Masters, has earned a tidy return on his investment, and is planning to expand. 89
Just as the Internet has transformed every other aspect of business, it is poised to remake the challenge of raising start-up money. This trend started with the use of social-media tools to link would-be entrepreneurs with people who want to make great ideas happen. At crowdfunding websites, such as AngelList, Crowdfunder.com , FundersClub, and Kickstarter, the entrepreneurs post their ideas, and anyone can donate to the cause. Until recently, crowdfunding was mostly limited to small contri- butions from people who gave in exchange for a company-provided experience, dis- count, or product sample; the funders don’t receive equity in the business. The main reason is that the Securities and Exchange Commission, which regulates investing, needs to ensure that investors on these sites have the same protections available to traditional investors. In 2012, however, Congress passed the Jumpstart Our Business Startups Act (JOBS Act), which allows crowdfunding sites to begin accepting equity investors after the SEC has prepared rules for this type of financing. As of this writing, the rules were expected to be ready before the end of 2013. If crowdfunding takes off, as some observers expect, entrepreneurs could have access to a huge new source of funds and new ways to convert customers into fans of the company, but they should be careful not to rely on the crowd to the exclusion of seasoned investors who might also provide valuable advice. 90
Most business plans devote so much attention to financial projections that they neglect other important information—information that matters greatly to astute investors. In fact, financial projections tend to be overly optimistic. Investors know this and discount the figures. In addition to the numbers, the best plans convey—and make certain that the entrepreneurs have carefully thought through—five key factors:
the people, the opportunity, the competition, the context, and risk and reward. 91 The people should be energetic and have skills and expertise directly relevant to the venture. For many astute investors, the people are the most important variable, more important even than the idea. Arthur Rock, a legendary venture capitalist who helped start Intel, Teledyne, and Apple, stated, “I invest in people, not ideas. If you can find good people, if they’re wrong about the product, they’ll make a switch.” 92
The opportunity should provide a competitive advantage that can be defended.
Customers are the focus here: Who is the customer? How does the customer make decisions? How will the product be priced? How will the venture reach all customer segments? How much does it cost to acquire and support a customer and to produce and deliver the product? How easy or difficult is it to retain a customer?
It is also essential to consider the competition fully. The plan must identify current competitors and their strengths and weaknesses, predict how they will respond to the new venture, indicate how the new venture will respond to the competitors’
responses, identify future potential competitors,
The opportunity should provide a competitive advantage that can be defended.
and consider how to collaborate with or face off against actual or potential competitors. The original plan for Zappos was for its website to compete with other online shoe retailers by offering a wider selection than they did.
However, most people buy shoes in stores, so Zappos cofounders Nick Swinmurn and Tony Hsieh soon real- ized that they needed a broader view of the competition.
They began focusing more on service and planning a distribution method that would make online shopping as successful as visiting a store. 93
The environmental context should be a favorable one from regulatory and economic perspectives. Such fac- tors as tax policies, rules about raising capital, interest rates, inflation, and exchange rates will affect the viability of the new venture. The context can make it easier or
harder to get backing and to succeed. Importantly, the plan should make clear that you know that the context inevitably will change, forecast how the changes will affect the business, and describe how you will deal with the changes.
The risk must be understood and addressed as fully as possible. The future is always uncertain, and the elements described in the plan will change over time.
Although you cannot predict the future, you must contemplate head-on the pos- sibilities of key people leaving, interest rates changing, a key customer leaving, or a powerful competitor responding ferociously. Then describe what you will do to prevent, avoid, or cope with such possibilities. You should also speak to the end of the process: how to get money out of the business eventually. Will you go public?
Will you sell or liquidate? What are the various possibilities for investors to realize their ultimate gains? 94
Selling the Plan Your goal is to get investors to support the plan, so the elements of a great plan, as just described, are essential. It’s also important whom you decide to try to convince to back your plan.
Many entrepreneurs want passive investors who will give them money and let them do what they want. Doctors and dentists generally fit this image. Professional venture capitalists do not—they demand more control and more of the returns. But when a business goes wrong—and chances are, it will—nonprofessional investors are less helpful and less likely to advance more (needed) money. Sophisticated investors have seen sinking ships before and know how to help. They are more likely to solve prob- lems, provide more money, and navigate financial and legal waters. 95
View the plan as a way for you to figure out how to reduce risk, maximize reward, and convince others that you understand the entire new venture process. Don’t put together a plan built on nạveté or overconfidence or one that cleverly hides major flaws. You might not fool others, and you certainly would be fooling yourself.
Nonfinancial Resources Also crucial to the success of a new business are nonfi- nancial resources, including legitimacy in the minds of the public and the various ways in which other people can help.
Legitimacy An important resource for the new venture is legitimacy —people’s judgment of a company’s acceptance, appropriateness, and desirability. 96 When the market confers legitimacy, it helps overcome the liability of newness that creates a high percentage of new venture failure. 97 Legitimacy helps a firm acquire other resources such as top managers, good employees, financial resources, and government support.
In a three-year study tracking business start-ups, the likelihood that a company would succeed at selling products, hiring employees, and attracting investors depended most on how skillfully entrepreneurs demonstrated that their business was legitimate. 98
legitimacy
People’s judgment of a company’s acceptance, appropriateness, and
desirability, generally stemming from company goals and methods that are consistent with societal values.
Entrepreneurs should carefully consider the five key factors when developing a business plan:
the people, the opportunity, the competition, the context, and risk and reward. Typically, financial projections dominate the plan while these other important factors are overlooked or undervalued.
A business is legitimate if its goals and methods are consistent with societal values.
You can generate legitimacy by visibly conforming to rules and expectations created by governments, credentialing associations, and professional organizations; by visibly endorsing widely held values; and by visibly practicing widely held beliefs. 99
In Practice