Professional advice is the key to success
Without a business model, a start-up now is no more than a dead duck
The big consulting companies are reporting more pleas for help from high-tech firms trying to craft professional business plans. Many young firms are seriously inept at making business models and plans, and a dire need for cash has sent them to the consulting departments of local accounting companies.
During the wild flight of the high-tech industry it was enough for an investor just to glance at a business plan's cover before agreeing to invest in a start-up company. Now, the entrepreneurs know that without a professional analysis of a firm's operations, an understanding of the market in which it is to operate, and the formulation of appropriate business strategy, start-ups have no chance of survival.
"During the era of euphoria," says Ido Kapner, a senior business planning consultant at the Kesselman PWC consulting firm. "The investors, who were venture capital funds and `angels,' just needed some sort of plan and did not pay much attention to the details."
Kapner recalls that there were some companies that received business plans via fax or e-mail without the client ever meeting the author of the plan. Michael Burshtine, a managing partner of Kesselman, says the entrepreneurs are not the only ones to blame for that phenomenon.
"Even though they had no experience in business management, they were trying to solve problems that the greatest executives could not have coped with," he says. "The entrepreneur had to cope simultaneously with technological, administrative and marketing aspects and also educate the market to adopt the products that he had developed. Many of the entrepreneurs simply asked an English-speaking colleague to prepare a business plan because they didn't have any money. Afterward they raised capital, in many cases much too easily, and that complicated matters even more."
There are currently about 900 start-ups in Israel that obtained investments from VC funds. Several dozen of these start-ups closed during the past year and a few hundred more will close over the next two years, according to industry forecasts.
In addition to these, there are hundreds of start-ups that have not yet raised funds from VC funds. In order to progress to the next stage of their development, many start-ups have to change their business models and formulate a clear strategy.
It costs $10,000-$15,000 to prepare a business plan for a start-up and several tens of thousands of dollars to prepare a business plan for a telecommunications tender or a big business deal.
Eran Shalev, a partner and department head at KPMG-Somekh Chaikin, says that in the past few months there has been a change in the approach of small companies. "The essential change is in the business plans of the small companies," says Shalev. "The large accounting firms set up departments that provide these companies with comprehensive services covering financing, accounting, taxation, consulting and payroll. One has to really get to know the technology companies in order to build them an appropriate plan.
"One of the characteristic problems of many business plans was the general definition of the market in which they were operating, and this led to the drawing of erroneous conclusions. A company that developed solutions for the cellular Internet, for example, calculated the forecast of its operations without isolating the field in which it was operating. The calculation was made like this: If the whole market amounts to $20 billion, it is enough to capture 1 percent of it to have revenues of $200 million," explained Burshtine. This formula resulted in double errors because not only were the forecasts overoptimistic, it also turned out that the overall view of the market was inapplicable.
"A business plan must have several legs to stand on," Burshtine continued. "The first is the correct definition of the market and the establishment of correct data. One has to be hooked up to expensive databases and small enterprises cannot bear such costs. Even obtaining the correct data does not solve the problem because the information does not always address the specific needs of the company.
"The second pillar is a clear-cut definition of the product and the need it comes to fill. An awful lot of ideas are not ripe enough and a lot of companies spread themselves out over too many fields.
"The third pillar," says Burshtine, "is the situation of the project in the correct stage of its life cycle. A young company is expected to provide in-depth information regarding development costs and the financial forecast. A company that is already three years old should have long-term forecasts, even at the expense of the depth."
Burshtine notes that companies that have been around for a while eventually provide excellent forecasts compared to those of younger companies.
Benny De-Kalo, a partner in the De-Kalo Ben Yehuda investment house, says that investors do not expect the business plan to describe the market in 30 pages, but rather to focus on the financial forecasts. "They [the investors] want to know how much money is needed, what it will be used for and how long it will last," explains De-Kalo. "If there is no such forecast for 12-18 months, you've got a problem."
De-Kalo does not order a business plan for start-up companies on their first round of capital raising. "There's no need for it," he says. "The investors also know that at the seed stage the plan is only worth the paper it's written on."
"Nowadays there is a need for a model that shows revenues and profits," says Shalev. "It's not enough to prepare a plan that is a marketing paper, like in the distant past."
Kapner notes that one of the main questions asked by potential investors is, "When will we see the first dollar of revenues? There's no doubt about it, profits are back in fashion."