Page 17 - Business Plans that Work A Guide for Small Business

8 • Business Plans that Work

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of investment into early-stage deals and a whopping $22 million per
round into later-stage deals. Expected to spend this money, many of the
Internet entrepreneurs spent foolishly in vain efforts to capture market
share. Boo.com spent $130 million in 7 months to launch a fashion Web
site, and failed. Webvan, a grocery delivery service, blew over $800 mil-
lion and then failed. The excess money insulated these companies from
the market validation of their value proposition. That is, these compa-
nies used investor money, rather than profits, to sustain operations (at
least in the short term). With huge war chests of cash, these companies
could sell their product or provide their service at a loss, and never really
understand if they could ever command a price high enough to generate
a profit. Market share was all that mattered, because there was going to
be some investor (usually the public market) who would pay more than
the company was worth. Then, conceivably, the entrepreneur and early
investors could get their money out plus huge returns. Ultimately, these
companies destroyed wealth, and few entrepreneurs enjoyed the highly
publicized short-term gains. Toby Lenk, founder of eToys, was worth
$850 million dollars (on paper) the day after his company went public. In
part, to set an example, and in part because selling a large chunk of his
shares would have hurt the overall value of his company, Toby Lenk held
almost all of his shares until the company went bankrupt. 11
The key is to get enough money to get started, but not so much that
your business is insulated from market tests. It is critical to learn early
whether your product or service has the potential to earn profits. Your
venture needs to answer several questions in the early iterations of growth.
Will the customer pay enough for the product so that the firm can be prof-
itable? Will the customer stay loyal to your company or shop for the best
price? How much will it cost to capture the customer in the first place? If
your entrepreneurial venture is on a tight budget, you learn the answers
to these questions quickly. You then have time to adapt your business so
that it does answer the questions in the affirmative. Business planning
helps you define milestones that you need to achieve on your journey to-
ward a sustainable business. Once you identify these milestones, business
planning helps you assess how much capital you need to achieve them and
when you should raise that capital. Devise your funding strategy around

10 VentureOne.
11 M. Sokolove, “How to Lose $850 Million—and Not Really Care,” New York Times
Magazine, June 9, 2002, 64–67.