Sincerely,

BlueLake Partners, LLC

Experienced investors fund young companies knowing that the companies will make mistakes. The investors hope that the companies will learn from these mistakes.

The rules change when later-stage funding is sought. Standards are higher. Reading at a first-grade level is great when you are in kindergarten; not so good when you are about to take the MCAS (Regents Exam equivalent in Massachusetts for any “out-of-towners.”)

Companies are expected to learn, to get smarter, more efficient and more focused.

Much is written about Top Ten Business Plan Mistakes; much is written about obtaining first-round funding. This issue of the The Perspective from BlueLake focuses on what makes these later plans good. What are some of the characteristics of high-quality second- and third-round plans?

1. It is a plan.
Too many popular books on the topic treat a business plan as a sales document. A business plan is a plan. This fact is especially relevant when seeking funding for a business which has a history, has learned from its market, and can be specific about its next set of activities.

2. There is a strategy.
Or, as our forty-first President said, “…the vision thing.” New companies often need some time to listen to the market, to figure out which assumptions were wrong, pass certain milestones (like finishing the product) and refocus the strategy based upon knowledge gained from these activities. But there are time limits. Investors can reasonably expect that out of, what the great detective, Nero Wolfe, called “intelligence, guided by experience,” there will grow a clear strategy.

A good business plan expresses the company strategy early and uses it as the skeleton on which the rest of the plan is built. Strategy should not be described in a bunch of words, creating a big tent under which all possible business models can huddle. Strategy is focused on what will make the company succeed and create value for stockholders. It is clear and meaningful, and can change over time.

3. It is a cohesive document.
More importantly, a coordinated plan. Too many plans have chapters written by people who not only do not share the same vision; it does not appear that they work for the same company. A plan can be written by a team, but it needs to be a well-coordinated team. Even when all of the text sections of a plan make sense and work together, a problem like the following may occur: The controller has been given the job of creating the financial model for the plan. In order to make the deadlines, she makes the best assumptions she can, but they do not agree with the assumptions in the text – number of units sold, commissions, numbers of sales people, product development costs, staff numbers, and so on.

A good plan must have what a German-born friend of BlueLake describes as “together-hang.”

4. The plan is readable and clear.
This one seems obvious, but it is crucial. If you have been talking to prospective customers and have refined your pitch, it should be clear. If you have used this information to direct your product or service development, what steps you need to take should be clear. If the team is on the same wavelength, it should be clear.

5. The plan shows market focus.
Many technology companies are formed to exploit technology developed in the lab. Most professional investors closely monitor the motivation of the company’s technical founders. Technical founders can be inspired by building a company, growing it, and creating liquidity. But sometimes they are motivated by doing fascinating research, exploring technical frontiers, and staying in the laboratory. Business goals and research goals are both laudable, but investors are in business to fund business goals.

So an investor will look at the emphasis in a plan. Is the focus on finding customers, altering the company’s offerings to fit the market, making sales, building value? Or is the focus on adding functionality (regardless of customer demand), doing more development, adding more developers and scientists?

6. The authors understand the need for organizational transition.
This piece of a plan is another reality test. A medical device company CEO one of our partners used to mentor agreed that as they passed through FDA approval, the company would transform itself from an R&D focused company into a sales and marketing driven organization. He appeared motivated. Our partner pointed out to the CEO that he would have to downsize the development staff and add sales and marketing people to effectuate these changes. The CEO was shocked when he realized that making this change was necessary. He found every excuse to put it off.

Companies, especially young rapidly growing companies, have to change their organizational structures multiple times. A good plan recognizes and accepts this fact, and makes the transition as easy as possible for the firm’s staff members, finding ways to keep good people and improve and alter their skill sets as the company changes.

7. The plan shows professional management.
A good plan demonstrates professional management, not just with resumes, but also with thinking, planning, knowledge, and results. The individual sections of the plan need to reflect that each manager knows what he or she is doing. The functional plans – sales, marketing, support, professional services, development, finance and admin. – should be detailed, competent and flexible. A good plan shows progress in each area and the ability to scale up if needed.

Investors will be interested to see if the founders have been able to build the team by adding new “A” players. To reiterate a point: a big-company middle management resume will be less impressive than a well-thought-through and well-written section of the plan.

8. Cash management is mentioned.
It is rarely done, but impressive when you see it. A good plan will provide readers with a short section of cash management policies: how we stretch out vendors, how we work collections in a friendly but forceful way; how we have bought used furniture, how we do weekly cash flow projections, etc.

Competent cash management warms an investor’s heart. What have they put in? Cash. What should you be guarding and using carefully? Cash.

One of our managing partners was on a software company board with a venture capitalist that upset the company’s CEO by telling her, “Cash is more important than your mother.” The CEO was mollified when our partner suggested to her that cash was more important than the VC’s mother.

9. A thoughtful discussion of the uses of funds.
This section is frequently an afterthought. A good plan will have prepared the reader for this section. The overall strategic approach will talk about investment in various functional areas. The functional sections will have reasonably complete plans, which give some details. The financials will be consistent with these plans, and provide summary information and detail. The uses of funds section will tie in with all of these parts. It will be more meaningful than, “Well, okay, 25% for sales and marketing, 25% for development, and 50% for working capital.”

10. The plan has excitement.
This area is hard to define. But good plans get the reader excited. Excitement is not generated by a CEO repeating hackneyed promises (e.g., “we are uniquely qualified to dominate this rapidly growing market opportunity.”)

A good plan breathes competence and builds as you read through it. It does not necessarily have all the answers, but it is thoughtful and thorough, and leaves the reader feeling that the management team is ready to solve the problems they will encounter. Reading the plan is like following the 2001 New England Patriots or the (alas) 1918 Boston Red Sox – you know they are going to succeed. You get caught up in the excitement.Whether you are writing a plan or reading one, look for these qualities.

If you are writing your plan and it falls short, you should stop to consider whether the problems are in the plan or in your organization. You may need to take some corrective action to build a stronger company and plan. You may need to consider options which go beyond seeking more money to do more of the same.

And at BlueLake Partners, we are always happy to talk with you about these issues.

— Peter Miller, Margaret Johns, William Luke and Ron Rossetti

If you have any comments or observations, we are very interested in hearing from you at Newsletter@BlueLakePartners.com.