58 - 1 - McKinsey Manual For Entrepreneurs

Business plan
preparation
Manual for Entrepreneurs
© Copyright 2002 McKinsey & Company

Confidential
Not for further reproduction or distribution
AGENDA
• Short introduction to the use

of business plans
• Preparation guidelines for

business plans
1
TYPES OF NEW BUSINESSES EXAMPLES
New high-growth
ventures
New
New product New industry
• Palm • Direct satellite TV
• Smart • Netscape
• Sony Playstation • Mobile telephony
• Rollerblades
Product/
service
Existing indus- New business
tries and busi- system
nesses • Dell
• Fotolabo
• Charles Schwab
• FedEx
Existing
Existing New
Business system
Source: Planen, gründen, wachsen (McKinsey & Company) 2

USE OF BUSINESS PLANS
Standard use Complications for

New Venture projects
• Start-up companies:
– Application for venture capital • High insecurity concerning
– Search for management team technology, timing, and
Start-up
members cash need
business
– Communication with partners, • Difficult data situation due plans to be
suppliers, … to newness of innovative tailored to
• Established, developed products new venture
businesses for investment • Necessity of external needs
decisions know-how transfer
– In-house budget allocations • Lack of skills/motivation/
– External financing time
Source: McKinsey & Company 3

GENERIC REQUIREMENTS
Explanation
Business planning is an iterative and adaptive process

Constantly
adapting that requires constant update and adjustment work
Impressing by Not the quantity of analyses, but the clarity and

clarity preciseness of the pack are important
No hype, but factual statements. Enthusiasm will be

Convincing by facts generated by the investor realizing the opportunity on
his own
Understandable Those who allocate investment resources rarely are

even for non-experts technical experts for the technology used in the
proposal
Consistent The storyline and all the facts presented must fit
and concise together and generate a well rounded impression
Optically A clear, precise structure is a courtesy to those

compelling investing their time in reading the proposal

DEVELOPMENT STEPS FOR BUSINESS PLANS
Milestones
Level of maturity
of business idea
Completion of
financing
• External
evaluation (due
diligence)
Step 3: • Deal structuring
VC-tailored
business plan
• Management team
• Implementation plan
• Financing
Step 2:
Rough
business plan
• Marketing and sales New decision
• Business system on further proceeding
Step 1: • Opportunities and risks when next milestone is
Idea reached
description
• Product/service
• Market and competition
Time

REQUIRED BUSINESS PLAN ELEMENTS IN EACH PHASE Required
FOR THIS COMPETITION element
Phase I Phase II
Executive summary
Product/service
Management team
Market and competition
Marketing and sales
Business system/organization
Implementation schedule
Opportunities and risks
Appendix

AGENDA
• Short introduction to the use of

business plans
• Preparation guidelines for

business plans
7
CHAPTERS OF COMPLETE BUSINESS PLAN
Manage-
Executive Product/
ment
summary service
team
Market Marketing
and com- and Business system
petition sales
Imple- Opportunities
Financ-
mentation and
ing
plan risks

CONTENT OF EXECUTIVE SUMMARY
• Gives a brief overview of the

concept's most important
aspects
• Describes idea as clearly, Manage-
Executive Product/
compellingly, and concisely
summary service ment
as possible
team
• Raises interest of decision
makers
• Is not more than 5 - 10 Market Marketing
minutes to read and com- and Business
petition sales system
Quality of summary decides if

rest of business plan is read
Implemen-
tation Financ- Opportuni-
plan ing ties and
risks

EXECUTIVE SUMMARY – KEY QUESTIONS PHASE I
Idea description
• What is your business idea? In what way does it
fulfill the criterion of uniqueness?
• Who are your target customers?
• What is the value for those customers? Most important
questions an
• What market volume and growth rates do you
investor asks!
forecast?
• What competitive environment do you face?
• What additional stages of development are
needed?
• How much investment is necessary (estimated)?
• What long-term goals have you set?

EXECUTIVE SUMMARY – ADDITIONAL QUESTIONS PHASE I
Rough business plan

• How high do you estimate your financing
needs?
• What are the sales, cost, and profit situations?
• What are the most important milestones along Most important
the way to your goal? questions an
investor asks!
• What test customers have you approached/
could you approach?
• What distribution channels will you use?
• What partnerships would you like to enter into?
• What opportunities and risks do you face?
• What is the picture on patents?

RUSMAR – EXECUTIVE SUMMARY CASE EXAMPLE
Product/service • Potential foam plus applicator to replace expensive and space consuming earth that
must be spread over garbage dumps every day
• Space savings of ~30% for dump operators
• Costs of coverage reduced by ~50% for dump operators
Market and • Customers: household garbage dump operator

competition • Market: 300 to 500 dumps in Eastern USA with capacity of 500 to 10,000 tons/day
• Major competitor: 3M/Sanifoam (application takes longer and is more complicated)
Marketing and sales • 1997: Investments of USD 850,000 required

• 1998: Sales of USD 2 million (break-even)
• 2002: Sales of USD 15 million, profit of USD 1.5 million
Business system • Sale of foam and applicators (product business)
Opportunities and • Necessary approval from authorities

risks • Proof of system's operational efficiency
Source: Inc. Magazine 12

EXECUTIVE SUMMARY – ADDITIONAL QUESTIONS PHASE II
Most important
Additional questions for complete business plan questions an
investor asks!
• Summarize the results of your detailed business
planning and state your exact financing needs!
• How will you delegate management tasks?
• How much production capacity is necessary?
• How will the implementation of your business
idea be organized?
• List your next, concrete steps!

CONTENT OF PRODUCT/SERVICE SECTION
• Describes the function the

product/service fulfills and the
benefits the customer will gain Executive Manage-
Product/
from it summary ment
service
– Product/service description team
– Customer value
• Explains status and next steps Market Marketing
of product/service development and
and com- Business
• Addresses patents/IP petition sales
system
protection issues
Implemen-
Product/service section has to tation Financ- Opportuni-
prove that entrepreneur can plan ing ties and
integrate the customers' risks
perspective

PRODUCT/SERVICE – KEY QUESTIONS PHASE I
Idea description
• What end customers will you address?
• What are the customers' needs?
• What customer value does your product/service provide?
• What is the nature of your innovation? Why is it unique?
• What partnerships are necessary to achieve full customer value?
• What competitor products already exist or are under development?
• What stage of development has your product or service reached?
• Do you have patents or licenses?
• What further development steps do you plan to take? What
milestones must be reached?

PRODUCT/SERVICE – ADDITIONAL QUESTIONS PHASE I
Rough business plan

• Which versions of your products/services are designed for which
customer groups and applications?
• What patents/licenses do the competitors have?
• What kind of service/maintenance will you offer?
• What product or service guarantees will you grant?
• Compare the strengths and weaknesses of comparable
products/services with yours in an overview!

DESCRIPTION OF THE PRODUCT/SERVICE EXEMPLARY
Technical description of lasers:
A device that converts incident electromagnetic

radiation of mixed frequencies to one or more
discrete frequencies of highly amplified and
coherent ultraviolet, visible, or infrared radiation
Better:
High-performance device for the creation

of a narrowly bundled beam of light
Source: The American Heritage Dictionary, Duden 17

SUCCESSFUL PRODUCT POSITIONING
Identify relevant customer needs and problems
Define clear, sufficiently large customer segments
Define uniqueness and position offering vis-à-vis competition
Address subjective perception of customers

PRODUCT/SERVICE – ADDITIONAL QUESTIONS PHASE II
Additional questions for complete business plan

• What resources (time, personnel, materials) do you
require for each subsequent development?
• What share of sales do you expect from your
various products/services (if applicable)? Why?
• What income from royalties/sales do you estimate
from possibly marketing the property rights?
Who would be your licensees/buyers?

CONTENT OF MANAGEMENT TEAM SECTION
• Outlines educational
background and professional Executive Product/ Manage-
experience of founders summary service ment
team
• Describes how existing skill
gaps can be closed in the
future Market Marketing
• Convinces potential investors and com- and
Business
that both managerial and petition sales
system
technological expertise is
present to run the venture
Implemen-
Venture capitalist will invest only plan ing ties and
if the venture is managed by an risks
excellent team

MANAGEMENT TEAM – KEY QUESTIONS PHASE II
Complete business plan

• Who are the members of your management team and what
distinguishes them: education, professional experience, success,
standing in the business world?
• What experience or abilities does the team possess that will be
useful for implementing your concept and setting up your
company?
• What experience or abilities are lacking? How will the gaps be
closed? By whom?
• What targets do the team members pursue by starting up the
business? How high is the motivation of the individual team
members?

REASONS FOR BUSINESS PLAN REJECTION –
BIOTECHNOLOGY VENTURES*
Percent**
Weak management team 52
Not market-driven 38
Long time frame 31
Money commitment too large 25
Not patentable 15
"If you find good
Inadequate technical expertise 12
people, they can always change
17 the product. Nearly every mistake I
Other
have made has been picking the
wrong people, not the wrong
idea"– Arthur Rock
Arthur Rock & Co.
* Reasons for rejecting business plans by firms experienced in biotechnology venture capital
** Multiple responses given
Source: Coopers and Lybrand, McKinsey & Company 22
TEAM RAMP-UP – EXAMPLES EXEMPLARY
Idea and Technol- Proof of Sustained

Venture Explosive
team devel- ogy & mkt. economic earnings
begins revenue growth
opment validation viability growth
CEO X
Technology X
X
Marketing X
Sales X
Finance X
Source: McKinsey & Company analysis, external interviews 23

PERCENTAGE OF FOUNDERS OF FAST GROWING COMPANIES*
Unemployed Start-ups
or recent graduate Midsize to large companies
4
6 (including Fortune 1000)
Not from
13 Examples include
business
42 • Intel
• Microsoft
• Lotus
14 • Sun Microsystems
Running other • Mattel
businesses • CompuServe
• Advanced Micro Devices
21 • Raytheon
• Fairchild Semiconductor
Small established • TRW
companies • CondeNast
• News Corp
* 4-year growth rate of 573% or higher, 1984 - 1990, 456 companies

NECESSARY EXPERIENCE FOR VENTURE MANAGEMENT
Traditional corporate … but corporate Catherine Hapka, CEO

experience does not fit experience is valuable Rhythms NetConnections
new venture needs … when it includes • Former EVP of US West
• Responsible for business and
• Skills aligned to • Business building telecommunications units with
achieving near term roles, e.g., USD 7.5 billion in revenues
earnings and – Led expansion into • Started and built US West’s
sustained revenue new geographic INTERPRISE Networking Services
growth markets Unit to USD 400 million in revenue
• Processes based on – Built new product • Established partnerships with 15
internal milestones line or division leading hardware and software
• Staff support allows – Provided providers
extensive delegation marketing
(e.g., HR, finance, leadership to Richard Thompson, CEO
marketing) develop a new Aradigm
• Decision making brand • Former President of Johnson &
enabled by significant • Relevant industry Johnson subsidiary, Lifescan
capital resources sector experience • Built Lifescan from the ground up
• Led within Johnson & Johnson
expansion into Europe and Japan
Source: Executive search firm and VC interviews 25

SKILL SET OF TEAM MEMBERS EXAMPLE
Team members
High skill level
J. Chapuis S. Fischer M. Tscharner Medium skill level
Skill gaps
Technology
Finance
Hard factors
Project management
Contacts
Marketing/sales
Production
Obvious skill
Human resources
gaps to be filled
with additional
Soft factors
Social competence team members

Initiative
Communication
Sales/negotiation skills

CONTENT OF MARKET AND COMPETITION SECTION
• Provides thorough
understanding of markets and Executive Product/ Manage-
competitors: summary service ment
team
– Market size and growth
– Market segmentation
Market Marketing
– Competition and
and com- Business
– Positioning of product vis-à- petition sales
system
vis the competition
Implemen-
The market and competition plan ing ties and
section has to outline the full risks
economic potential of the
venture

MARKET AND COMPETITION – KEY QUESTIONS PHASE I
Idea description
• How is the industry developing?
• What role do innovation and technological advances play?
• How will you segment the market?
• What market volumes do the individual market segments have,
now and in the future (rough estimates)?
• Who are your target customer groups?
• What major competitors offer similar products/services?
• How sustainable will your competitive edge be?

MARKET AND COMPETITION – ADDITIONAL QUESTIONS PHASE I
Rough business plan

• What market volume (value and amount) do you estimate for
your individual market segments over the next five years?
• What will influence growth in the market segments?
• What is your estimate of current and future profitability of the
individual market segments?
• What market shares do you hold in each market segment?
What segments are you targeting?
• Who are your reference customers? How do you plan to get
reference customers?
• What are the key buying factors for customers?

MARKET CHARACTERISTICS EXAMPLE
ROUGH
ESTIMATES
Market size and growth Market competitiveness

Number of B2B marketplaces
Total revenues
of B2B marketplaces
estimated to grow at over
Market growth 100% per year – revenue
percent potential ~ USD 50 bn
in 2004
~ 1.000 - 2.000
100
Attractive Most vertical

specialty market-
places expected to
consolidate
50
Unattractive
0 ~ 100 - 200
Potential
market size 1999 2009
1 10 100 1000
USD millions

RUSMAR, INC. – TARGET CUSTOMERS CASE EXAMPLE
• Target customers: Operators

– Operators of one or more "larger" dumps for household garbage
– Eastern USA (approx. 300 to 500), beginning 2002, whole USA
– Throughput of 500 to 10,000 tons per day
– Fee of USD 65 per ton
• "Target customers": Agencies

– Environmental Protection Agency (federal regulatory body)
– Department of Natural Resources (state regulatory body)
– Local licensors
Consent required of three additional agencies

MARKET AND COMPETITION – ADDITIONAL QUESTIONS PHASE II

• How does the competition operate? What strategies are pursued?
• What are the barriers to market entry and how can they be
overcome?
• What market share does your competition have in the various market
segments?
• How profitable are your competitors?
• What are your competitors' marketing strategies?
• What distribution channels do your competitors use?
• How will competitors react to your market launch? How will you
respond to this reaction?
• Profile the strengths and weaknesses of your major competitors
with your own in the form of an overview!

COMPETITIVE ADVANTAGE
Number of hypergrowth companies

with unique competitive advantage
Revolutionary improve-
27
ment in performance
Unique
competitive Steep drop in price 19
advantage
Creation of unusually
emotional bond with 3
customer

RUSMAR, INC. – ANALYSIS OF THE COMPETITION
Not fulfilled
Fulfilled
Degree of fulfillment
Customer requirements Rusmar 3M/Sanifoam Reason
• Covering layers with low volume

• Short application times (longer Rusmar 30 min./3M 60 min.
dumping time) 3M two components
• Simple application Rusmar 6 cents per sq. ft.,
• Cost advantage per application 3M 13 cents
• Equal performance as layer of earth

Rusmar
regarding
leading
– Odor absorption
– Erosion from weather Rusmar 1.5 days/3M 3 days
– Protection from pests
• Constant availability of foam 3M USD 12 billion – company
• Applicator licence available quickly, at 3M
low cost, and without concern (without leading
reassessment of the dump by regulators)
• Rapid and high-quality maintenance Rusmar 0.5 h/3M 4h

CONTENT OF MARKETING AND SALES SECTION
• Outlines planned marketing Executive Product/ Manage-

and sales activities (four "Ps" summary service ment
framework): team
– Product
– Price Marketing
Market
– Place and com- and
Business
– Promotion petition sales
system
Marketing and sales section

Implemen-
has to explain how market is
developed
plan ing ties and
risks

MARKETING AND SALES – KEY QUESTIONS PHASE I
Idea description
Marketing and
• What final sales price do you want to charge (estimated)? sales only briefly
What criteria did you use to arrive at this final sale price? touched in
How high is the profit margin (estimated)? executive summary
(Phase I); more
• What sales volumes and sales revenues are you aiming
details are needed
for (estimated)?
in detailed
business plan
(Phase II)

QUANTIFYING THE CUSTOMER VALUE
Dimensions of customer
value
Time
Cost Quality
Reference Advantages Switching cost Incentive for Selling price of

price of new and dis- buying new new product
(currently product advantages product
Evaluate and quantify available (customers' (customers'
product) point of view) point of view)
customer value for all
3 dimensions
• Display value clearly
• Quantify wherever possible
Source: "Profitable pricing: guidelines for management", T.Nagle, R. Holden 37

MARKETING AND SALES – ADDITIONAL QUESTIONS PHASE II

• In which partial market segments will you make your
market entry? How do you plan to turn this "toehold"
into a high-volume business?
• What sales volumes are you targeting (detailed data by
market segment)?
• Describe the typical process of selling your
product/service. Who, among your buyers, ultimately
makes the purchasing decision?
• How will you win reference customers?
• How much, in time and resources, will it cost to acquire
a customer?
• Which advertising materials will you use to do so?
• What other planning steps are necessary in the run up
to launching your product/service? Draw up a schedule
with the most important milestones!

DETERMINING TARGET SEGMENTS ++ Very high
+ High
o Medium
Critical
Determine
Select Determine Analyse Identify
target segment
segmentation segment customer value competition per
and evolution
criteria volume per segment segment
strategy
Segment 1 ++ +
Segment 2 + ++
Segment 3 o ++ o
• Select clearly • Arrive at market • Understand • Consider direct • Make focus clear
separate and segments plausibly customer value competitors and for market launch
segments with a and validate it per segment substitutions • Anticipate
strong proposition evolution path

POSSIBLE CUSTOMER SEGMENTATION CRITERIA (EXAMPLES)
• Location: country, urban/rural (population density)

Consumer • Demographics: age, sex, income, profession, company size
goods • Lifestyle: techies, counterculture, active seniors
markets • Behavior: frequency of product use, product application
• Buying habits: brand preferences, price consciousness
• Demographics: company size, industry, location

Industrial • Operations: technology employed (e.g., digital, analog)
goods • Buying habits: centralized or decentralized purchasing,
markets purchasing criteria, supplier agreements
• Situational factors: urgency of need, order size, etc.

MARKETING AND SALES – ADDITIONAL QUESTIONS PHASE II

• What demands (employee number, qualifications, and outfitting)
must the operation meet in order to effectively implement its
marketing strategy? What is your estimated expenditure for
this area?
• How will sales volume and operating results be spread out
among the various distribution channels (estimated)?
• What are your expenses? At launch – and later.
• What price will you charge for your product/service per target
group and distribution channel?
• What payment policies will you lay down?

CONTENT OF BUSINESS SYSTEM SECTION
• Outlines what parts of the Manage-

Executive Product/
value chain are covered by
the venture
team
• Discusses organizational
issues
• Describes necessary Market Marketing
partnerships and com- and
• Makes "make or buy" Business
petition sales
decisions system
Business system section Implemen-

describes all necessary tation Financ- Opportuni-
elements that enable the plan ing ties and
venture to physically deliver risks
the customer value

BUSINESS SYSTEM – KEY QUESTIONS PHASE II

• What does the business system for your product/service
look like?
• What activities do you want to handle yourself?
• Where will the focus of your own activities lie?
• What business functions make up your organization,
and how is it structured?
• What resources do you need (quantitative and
qualitative) to create your product/service?
• How high is your need for technical input (raw materials,
materials to create your service)?
• What will you make, what will you buy?
• Which partners will you work with? What are the
advantages of working together for you and your
partners?

BUSINESS SYSTEM – VALUE CHAIN EXEMPLARY
Covered by
City Scape
Generic value Research & Marketing &

Production Distribution Service
chain Development Sales
Acqui-
Marke-
Develop- sition
City ting
ment of • General Internet
Case example Scape • Con- Business Updates,
Internet infor- pro- Licensing
City Scape system sumers sales services
tech- mation duction
design • Busi-
nology • Busi-
nesses
nesses
Source: Planen, gründen, wachsen 44

BUSINESS MODEL – REVENUES SOURCES EXEMPLARY
Highest
scalability
Revenue sources Description Revenue potential
Product business • E.g., sale of software tools
Services • Revenues resulting from

service provision or consulting
Contract • Development of customer-

development specific solutions
Others • Customer training

• Support/Maintenance
• IP sale/license fees
Product Product Product
line 1 line 2 line 3

BUSINESS SYSTEM – ADDITIONAL QUESTIONS PHASE II

• Where will you locate your business?
• What capacity for product manufacture and service production
do you plan (number of units)?
• How much will production and delivery of your product/
service cost?
• How, and at what cost, can you adjust your capacity in the
short term?
• What measures are planned for quality assurance?
• If you need a warehouse, how will you organize your inventory?
• How much of your product has to be put in storage?
• How are your costs structured (fixed, variable)?

CONTENT OF IMPLEMENTATION PLAN SECTION
• Describes the most

Executive Product/ Manage-
important activities and
milestones for the
team
development of the business
• Lists the planned short- and
long-term investments Market Marketing
• Links the investment needs and com- and
Business
with major milestones petition sales
system
The implementation plan Implemen-

section gives the investor a tation Financ- Opportuni-
clear roadmap to control the plan ing ties and
business development risks

IMPLEMENTATION PLAN – KEY QUESTIONS PHASE II

• What are the most important milestones for the development of
your business, and when must they be reached?
• How do you plan to structure the work to reach these targets?
• For which tasks/milestones do you anticipate bottlenecks?
• How many new employees will you need in the individual
business areas over the next five years? What will this cost?
• How much real capital is necessary to achieve initial sales?
• List your planned short-term investments!
• List your planned longer-term (3 - 5 years) investments!
• What investments will be required when which milestones are
reached?
• How high is the annual depreciation for each investment?

IMPLEMENTATION PLAN EXEMPLARY
Key success
Main activities 01/00 02/00 03/00 … 12/04 factors Responsible
• Activity 1 • KSF 1
Time frame year
1 - 5 with decreasing
• Activity 2 level of detail • KSF 2
• Activity 3 • KSF 3
Gantt timeline to show the
…
…
interdependence of the
activities and the eventual
bottlenecks
Detailed explanation of
investment needs:
Main milestones that pushes Main
the business to the next level; activities Expenses
focus on external milestones • Activities 1 - 3 • Personnel USD xx
(e.g., market entrance, product • Material USD xx
launch etc.) • … • …
USD xx
Milestones Milestone 1 … …
Investment need USD xxx USD xxx USD xxx

CITYSCAPE EXAMPLE – IMPLEMENTATION PLAN BACKUP
1998
1 2 3 4 5 6 7 8 9 10 11 12 1999 2000 2001 2002
Development
Software development
CityScape server setup/operation
Demo software development
Test/debugging Nuremberg
Catalog development
Development of transaction module
Marketing
Build up customer relationships
Develop marketing campaign
Launch marketing campaign
Start in Nuremberg
Start in Munich
Start in Würzburg
Start in Regensburg
Management
Founding of CityScape
Formation of team
Setup of operations
Recruiting of software specialists
Start of alliances with internet providers
First financing round
Second financing round
Third financing round
Milestones
First Start of Four Ten 30 60 100
CityScape CityScape cities cities cities cities cities
prototype Nuremberg
Source: "Planen, Gründen, Wachsen" 50
CONTENT OF FINANCING SECTION
• Provides rough cash-flow Manage-

Executive Product/
forecasts
• Outlines forecasts of profit team
and loss statements
• Gives overview of future
balance sheet structure Market Marketing
and com- and Business
petition sales system
The finance plan explains the
timing and volume of
necessary financing rounds Implemen-
plan ing ties and
risks

FINANCIAL PLANNING – KEY QUESTIONS PHASE II

• How will your revenues, expenses and income develop?
• How will your cash flow develop? When will you expect to break
even (= sum of all revenues greater than the sum of all expenses)?
• How high is your need for financing based on your liquidity
planning?
How much cash is needed in the worst case scenario?
• What assumptions underlie your financial planning?
• Which sources of capital are available to you to cover your
financing needs?
• What deal are you offering potential investors?
• What return can investors expect?
Financial plan outlines
• How will they realize a profit (exit options)? • Cash flow statement
• Income statement
• Balance sheet

APPLICATION OF FINANCIAL PLANNING INSTRUMENTS
Can I fulfill my financial Am I profitable? Where has my capital been
obligations at any time? invested, and where has it
come from?
Equity
Outside capital
Invoice Invoice
Invoice
Cash flow statement Income statement Balance sheet

Deposits Payments Proceeds Expenses Assets Equity + liabilities
... ... ... ... ... ...
... ... ... ... ... ...
... ... ... ... ... ...
Liquid funds Profit/loss Total = Balance sheet = Capital

assets total invested
Cause of bankruptcy: Cause of bankruptcy:

illiquidity excessive debt
(liquid funds < 0) (equity < 0)

CASH FLOW AND INCOME STATEMENT
Cash flow Income

statement statement
Deposits and payments Proceeds generated

Deposits and expenses Income
refer to the amount of
– liquid cash and are not (consumption of –
entered into the books resources) are entered
Payments until actual payment into the books for the Expenses
takes place period under review –
= irrespective of concrete =
payments
Liquid funds Profit/loss
Constantly safe-
guarding liquidity takes
top priority for start-up
companies

BALANCE SHEET STRUCTURE EXAMPLE BIOCHALLENGE
DM thousands
Assets Equity + liabilities
Fixed assets Equity

Intangible assets 20 Nominal capital 8,560
Real estate and buildings 0 Additional paid-in capital 0
Technical equipment, plant, 1,936 Net earnings/losses brought forward -7,229
and machinery Net income 2,470
Other equipment and fixed assets 0
Liabilities
Current assets Provisions 0
Raw materials and supplies 0 Long-term bank loans 4,500
Semi-finished and finished goods 20 Short-term bank loans 0
Accounts receivable 400 Accounts payable 20
Other receivables 0 Other liabilities
Liquid funds 5,945 0
Total assets 8,321 = Total equity + liabilities 8,321

STRUCTURE OF INCOME STATEMENTS IN DIFFERENT INDUSTRIES
Percent
Research and Automobiles & Publishing/
Food development Consulting Leasing Electronics machinery Chemicals printing Textiles
Revenues 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Sales 96.2 98.9 92.1 88.5 93.7 91.5 88.6 94.0 94.4
Other operat- 1.7 0.5 3.6 7.0 3.5 3.5 7.3 1.8 1.9
ional income
Extraordinary 2.1 0.6 4.3 4.5 2.8 4.9 4.2 4.3 3.7
income
Expenses 98.5 96.9 92.6 100.8 97.2 94.4 93.3 97.6 100.3
Cost of 61.7 0.7 – – 43.9 41.3 40.7 32.1 43.3

materials
Personnel
expenses
• Wages and 14.3 30.6 38.3 16.2 23.8 27.4 16.7 31.5 27.7
salaries
• Social security 2.8 7.7 6.6 2.9 4.1 4.6 3.2 4.8 4.1
Rent 0.5 2.4 3.1 1.6 1.1 0.6 0.3 1.0 0.4
Interest 1.1 0.5 1.4 39.5 1.4 1.3 1.7 2.0 2.3
Depreciation of 3.6 4.9 4.6 6.7 3.3 2.8 4.4 5.4 3.9
fixed assets
Other 0.2 0.0 0.6 0.1 0.7 0.9 3.3 2.3 0.9
depreciation
Other operating 14.4 50.1 38.2 33.8 19.0 16.5 23.3 18.5 17.6
expenses
Profit 1.5 3.1 7.4 -0.8 2.8 4.6 6.7 2.4 -0.3
Explanation necessary if business plan numbers

are significantly different than industry average 56
Source: Planen, gründen, wachsen (McKinsey & Company)
VALUATION METHODS
Valuation with DCF method Valuation with multiples

EUR thousands EUR thousands
Year Year
Free 1 2 3 4 5 1 2 3 4 5
cash Continuing
flows value*
11,000
Profit for relevant
period (year 5)
380 880
-150 Different 905 x 43

-1,960 -660 (multiple)
methods
Discount 65% 55% 45% 35% 25% 25% possible
rate
Discount 0.606 0.416 0.328 0.301 0.328 0.328
factor
EUR 38,900
Today's -1,188 -275 -49 115 289 3,608
value
Discount factor (IRR x 0.082
Entity + + + + + +
2,500 = 65% for 5 years)
value
Debt 0
Total 2,500 Total 3,190

value value
* Assumption: FCF in year 5 is 1,100, growth rate 6%, discount rate 16%
POSSIBLE SOURCES OF FUNDING
Financing stages
Seed Start-up Expansion
Personal savings
Loan by family
Government subsidies
Bank loans
Leasing
Venture capital
Stock market

TYPICAL VC FINANCING PROCESS
Business plan
Preselection
First visit and discussion
Letter of intent
Further discussions, evaluations
Term sheet
Due diligence
Contract negotiation
Contract, financing
Support, coaching, and control
Exit

CONTENT OF OPPORTUNITIES AND RISK SECTION
• Describes the venture's

specific opportunities Executive Product/ Manage-
• Identifies the venture's main summary service ment
challenges team
• Tries to assess and quantify
risks (e.g., with sensitivity Marketing
Market
analysis) and
and com- Business
• Develops countermeasures petition sales
system
for "killer" risks
Consideration of risk involved Implemen-

will win the confidence of a tation Financ- Opportuni-
potential investor plan ing ties and
risks

OPPORTUNITIES AND RISKS – KEY QUESTIONS PHASE II

• What basic risks (market, competition, technology) does
your business venture face?
• What measures will you take to counter these risks?
• What extraordinary opportunities/business
possibilities do you see for your company?
• How could an expansion of your capital base help?

TYPICAL RISKS – EXAMPLES
• Management team of the venture cannot be completed

Inside the
venture • Important team member (e.g., CTO) leaves venture
• Slow prototype development delays early market entry
• Strategic partner cannot be found

Outside the
venture • No agreement with sales channel partner
• Lead customer does not accept prototype

SENSITIVITY ANALYSIS EXEMPLARY
Cumulated cash flows

DM
Determinants of Best-case
different scenarios scenario Base-case
have to be well scenario
understood
Worst-case
Payback period scenario
Financing
need
Year
1 2 3 4 5

OPPORTUNITIES AND RISKS – ADDITIONAL QUESTIONS PHASE II

• What will your planning look like for the next five financial years
under both a best and worst case scenario?
• What effect will this have on your need for capital and
your return?
• In your view, how realistic are these scenarios?
• What consequence do they have on your business planning?

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Business plan

© Copyright 2002 McKinsey & Company

• Short introduction to the use

• Preparation guidelines for

Source: Planen, gründen, wachsen (McKinsey & Company) 2

Standard use Complications for

Source: McKinsey & Company 3

Business planning is an iterative and adaptive process

Impressing by Not the quantity of analyses, but the clarity and

No hype, but factual statements. Enthusiasm will be

Understandable Those who allocate investment resources rarely are

Optically A clear, precise structure is a courtesy to those

Source: McKinsey & Company 4

Source: McKinsey & Company 5

Market and competition

Marketing and sales

Opportunities and risks

Source: McKinsey & Company 6

• Short introduction to the use of

• Preparation guidelines for

Source: McKinsey & Company 8

• Gives a brief overview of the

Quality of summary decides if

Source: McKinsey & Company 9

Source: McKinsey & Company 10

Rough business plan

Source: McKinsey & Company 11

Market and • Customers: household garbage dump operator

Marketing and sales • 1997: Investments of USD 850,000 required

Business system • Sale of foam and applicators (product business)

Opportunities and • Necessary approval from authorities

Source: Inc. Magazine 12

Source: McKinsey & Company 13

• Describes the function the

Source: McKinsey & Company 14

Source: McKinsey & Company 15

Rough business plan

Source: McKinsey & Company 16

Technical description of lasers:

A device that converts incident electromagnetic

High-performance device for the creation

Source: The American Heritage Dictionary, Duden 17

Identify relevant customer needs and problems

Define clear, sufficiently large customer segments

Define uniqueness and position offering vis-à-vis competition

Address subjective perception of customers

Source: McKinsey & Company 18

Additional questions for complete business plan

Source: McKinsey & Company 19

Source: McKinsey & Company 20

Complete business plan

Source: McKinsey & Company 21

Weak management team 52

Long time frame 31

Money commitment too large 25

Idea and Technol- Proof of Sustained

Source: McKinsey & Company analysis, external interviews 23

* 4-year growth rate of 573% or higher, 1984 - 1990, 456 companies

Traditional corporate … but corporate Catherine Hapka, CEO