Once you have demonstrated that your idea can work and that there is a market potential for it, you are ready to build your business plan. Its goal is to spell out the market your spinout aims to enter, the competitors in needs to beat and the funding it needs to secure. If the case you make is compelling, the business plan will convince investors to fund your solution.
The business plan
The business plan can either come as a concise document or, more popular nowadays, as a comprehensive presentation. You should still consider developing paragraphs around each section listed below, as they will be required when filling in grant applications, incubator proposals or investment cases.
Before you start working on your business plan, you should give a lot of thought to the kind of business you are building. Consider how concrete your answers to the following questions are (if absent or too vague, you will have to invest more time in the preceding steps before pulling together your business plan):
- What pain in the market are you addressing through this company? How big is that pain?
- Whose pain is it? Who are your customers?
- What is your solution? How does it address the pain points your customers have?
- How big is your market? (And where is it?)
- How will you bring your solution into the market? Who can you rely on to help you access it? Are there other markets that could open up to you in the future?
- How much time and how many funds will you need to bring your solution to your customers? Where will the funds and extra skills required come from?
- Do you need access to specialist facilities/ special sites to develop your solution? If yes, how will you access them?
- Who are your competitors? What products/ services are they selling and how will yours be different? What is their current market share and how has it been evolving?
- Who will be involved in the company and in what capacity? How are their skills relevant for the roles? Any gaps in the skillset? If yes, how and when will they be filled?
Key points on your plan
Keep in mind the fact that the business plan is your roadmap to success, so it will need to be clear, concise, action-oriented and usable. It will need to easily address the question of what activity needs to happen when, who will perform it and how much funding it will take for the company to prosper. The plan should highlight priorities, responsibilities and deadlines, enabling investors, potential partners and yourself to clearly track progress.
As the title suggests, the business plan should focus less on the technology and more on the commercial side of your spinout. It needs to portray a solution that fills a clear need better, cheaper or faster than the competition. The plan also has to trace a credible route from the lab to the customers.
Your business plan sections
Consider the type of information that you and your partners/ investors would need to understand where your spinout is going and how it will get there. While the necessary data and analysis is likely to differ from business to business, your business plan will likely include most of the sections below.
- Executive summary. This is the only section of your plan that all investors will read, so keep it short (one page maximum) and clear. The executive summary will need to include key points about your solution, the needs it addresses and the commercial opportunity.
- Market analysis. The goal of this section is to highlight the opportunities available in the market your solution would enter. Investors are just as likely to make a funding decision based on the size of the opportunity as on the merits of your technology. Funders know that any issues with the latter can be addressed through further R&D, while the absence of a sizeable market will inhibit the uptake of even the most sophisticated technology. Under this section, you will need to detail the need that your solution addresses and highlight how your product/service is better than its rivals. The number of competitors, their market share, the size of the market and its evolution will have to be addressed as well. This requires intimate knowledge of the industry your solution is going into, so consider contracting an expert to run a market study and incorporate key findings from that into this section.
- Market access. You will need to clearly outline your pathway into the target market, not only in terms of how the solution will fit with existing technology, but also from a commercial standpoint. Crucial elements to tackle under this section include distribution channels, existing relationships and sales pipelines, product pricing and placement.
- Technology plan. The plan needs to shine a light on the technical challenges of bringing the technology to market and how your spinout will address them. While you will need to focus your solution on a (limited number of) niche market(s), this is where you could also mention future expansion opportunities to other products/markets.
- Business model. This section will have to clearly explain how your spinout will earn money, the magnitude and recurrence rate of cash inflows need for your business to be sustainable, how you aim to scale and how you plan to exit.
- Corporate governance plan. Key element that identifies the roles, authority, and timing in key business decisions of shareholders, directors and the CEO. The plan will enable you to set-up a robust decision-making structure that will give investors clarity and confidence in your venture.
- IP strategy. Intellectual property is a key asset for spinouts, so you will need to set up a plan of how it will be protected and managed. It should cover protection mechanisms for existing IP and future plans for developments expected in the 3 years to come.
- People plan. Outline the skills and experience of your current team and identify gaps to be filled. Consider whether the gaps should be filled through new hires, board members or mentors, highlighting how you will secure their involvement. You may want to expand your search through your wider network, UCLB or collaborations with initial investors.
- Risk analysis. Investors will want to see that you have considered scenarios where things do not go as planned and that you have thought of measures to take to bring your company back on track. Always outline the financial and operational implications of each scenario.
- Financial and operating plan. After the executive summary, this is probably the most-read section of the average business plan, as it contains key information on the investment required to bring the solution to the market, on the revenue expected and its timeline, as well as on the expected return at an exit. Include financial projections for at least 3 years (some investors will ask for 5-year financial outlooks), including summary figures for the profit and loss account, balance sheet and expected cash flow. For the first year of your projection, break all your figures down into monthly positions; the following years could feature quarterly projections. Take into account the fact that most investors will only back you if they believe they can make substantial returns in a reasonable time scale (usually around 10x), so consider including RoI estimates.
The capitalisation table (cap table)
As part of your business plan (especially the sections related to equity distribution and the company’s governance) you may refer to the cap table: a spreadsheet that sets out how equity is divided in your spinout. A basic version of it would simply account for the founders and each founder’s portion of equity; it would probably also set aside a certain percentage of the company shares (usually between 10 and 20%) in an option pool meant to incentivise initial team additions. As investors come on board, they would be added to the cap table and the initial shareholders’ equity stake would dilute. However, keep in mind that (in relation to value) dilution does not necessarily mean anything in itself: 1% of a £10million business is more than 100% of a company worth £10,000.
Portico Ventures has developed cap table templates that you may use for your equity modelling purposes. The cap table is a living document and each investment round will require it to be updated. However, remember that you cannot just issue shares whenever you feel like it: such actions are regulated by the terms of running a limited company and all existing (voting) shareholders are legally required to be allowed to vote on any such amendment.