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Ask HN: How to write a business plan for an Internet startup?
51 points by hamgav on Jan 8, 2009 | hide | past | web | favorite | 49 comments
I've been approached by some investors who want to invest in my startup. They've asked me to put together a business plan - listing costs/revenue etc. Do I include my salary costs in this or do I assume that I won't be taking a salary? Any feedback/reading material will help!

I've written more business plans than I care to think about. This is my experience:

1) A business plan is a marketing document. Usually you are using it to sell your business to banks, investors or partners. You have to think of your audience when you write it. An investor likes to see projected revenues that are high and don't mind that there's a risk - banks are the other way around.

2) Don't use business plans as a plan of how to run your company, write a one page strategy note instead. I have never seen a businessplan that was followed 100% and turned into a successful business. Everything changes fast in a startup, and you have to adapt accordingly.

3) Make sure you don't write something in your businessplan you can't honor. Investors and banks will look at it and blame you if they invested money and you don't live up to what you have written. Make sure to have escape routes. (If this and this market condition is true we will do such and such, if it isn't we can't do jack shit, we expect to do such and such but require this or that to reach these lofty goals) This will give you leverage and deniability in later negotiations.

4) Make sure you use a lot of sources to underpin and validate your assumptions (Gartner projects that within the next five years this trend will do something, making it inevitable that we will make loads of money since we're currently the only ones in this business) This will lend you credibility.

5) Make good budgets, and talk about your assumptions in the business plan. Budgets are the first thing investors look at. Particularly the assumptions behind the numbers.

6) Beware of investors that think everything in your business plan is a road map that simply needs to be followed in order to attain fame, glory and fuck-you money: They don't know what they're talking about.

Do you have any stories about how any of those business plans helped companies you were working on? I'd love to hear some.

They helped get funding for two companies I started :-)

I've found that it's really hard to write business plans for other people, and for companies you aren't directly involved in. It's probably a bit like when biz types ask a programmer to write what it says in their business plan - they haven't really thought about a lot of the underlying assumptions and how much work it is to do right. It works the other way around too.

I just wrote a somewhat related blogentry here: http://www.maximise.dk/blog/2009/01/business-plans-for-hacke...

I don't like your statement about a business plan not being a plan to run your company, that is exactly what it should be. Though maybe your 1 page strategy document is your real business plan. The business plan is just a name though, you should have 2 sets of books/plans: 1) Internal accounting that is very pessimistic and realistic and assumes the worst case scenario and prepares for it. 2) External accounting that is incredibly optimistic and assumes every possible best break will happen 100% of the time.

I'm not sure if this is what you were saying, but you should NEVER have 2 sets of actual accounting books. The numbers are the numbers, the truth is the truth.

You can create and present a document that shows your expectations and assumptions, but you can't say you made X amount of sales and Y amount of profit when the real numbers are different.

In reality though, the data you show and present should be realistic and perhaps slightly cautious. This is what you are going to be measured against. Being "incredibly optimistic" when you do not believe this to be true is really kind of fraudulent.

Set expectations for what can reasonably happen with the resources/constraints you are working with. Internally, manage your capital as if it were your last dollar. If you do not meet the expectations set, determine why.

Actually there are two types of accounting balance sheet methods so by definition, you should have and it would be better to have 2.

The first is an historical value based balance sheet where you record everything at what they cost you. For example lets say you bought real estate in 1920 for $1k and now its worth $1million. Historically you paid $1k and you can actually write that in, and you'd want to do that to show you "little" money your company makes, for things like taxes and such

The second case is a market value balance sheet where you record the market value of everything. If your company has inventory, you'd list its value at what it's worth, rather than what it cost you to make it. The interesting thing here is inventory is recorded as an asset. So at the end of the year if you have $50million of market value inventory sitting in a warehouse, a balance sheet will show how much money you MADE (even though you have not sold it). This is very good if you want to attract investors/loans and very bad for paying taxes ....

The point is both are legitimate and needed. The market value sheet will obviously produce a more accurate picture, but seeing as how inventory is an asset, there really is no "super accurate" picture, which is why it is important to keep accurate records for different scenarios.

I recommend an oldie but goodie: "Buy low, sell high, , collect early, pay late" - Dick Levin

edit: i realize I am not in disagreement with you, rather just want to highlight what I think for other HN that there is a need for different versions of the same thing, and its quite legal.

What if you rebate the cost of your software to customers for a trial period? Do you think that counts as revenue or as nill?

What if you prepay for a year of office space before the end of your fiscal year to show no profit in a year? Did you make a profit or not? These are different ways to interpret the same numbers.

Try (as much as possible) to stick to GAAP standards and you'll be fine.

Choosing how/when you depreciate certain assets, or if you use a FIFO or LIFO inventory process is all well and good. But you would still have 1 single set of accounting books/data.

I never enjoyed the accounting part of the companies I've started, but I've learned there are things you could do, things you should do and things that you shouldn't do. There is not a whole lot of room for interpretation, especially if you want to try to raise money or sell the company at any point.

In theory I agree with you - but in practise I don't.

There are a number of reasons why business plans don't seem to work as a plan to run the company.

- The business plan of many companies tends to be a stale document that never gets rewritten, and gets more and more out of whack with reality until it is completely obsolete.

- If there are many stakeholders (investors, founders, banks, partners. etc.) they will all need to give their consent whenever changes are made. This easily turns into political hell with you in the middle.

- The more specific you are in your businessplan the more it will come back to haunt you. If you wrote it and it turns out not to be the way you said it's your falut.

- Nobody actually reads updates to business plans, thus rendering them unusable.

Some of these can of course be remedied, but it's a lot of hard work. And maybe that effort is better used building a product or getting customers.

If you have an internal planning business plan document and things don't turn out the way you said they would. You should be 100% accountable to yourself, your partners, and your employees about why your projections were wrong.

While I realize much of the capitalist world still operates this way, I'd be hesitant about anyone who asked for a business plan. While a business plan isn't entirely a waste of time, there's just so much of it dedicated to pulling meaningless numbers out of your ass as to be an exercise in futility, and it gives them something to be pissed at you about later if you miss your fictional quotas.

And if I even heard the phrase "pro forma" I'd run.


We talked to about 20 investing entities (maybe 5 or 6 VC firms, a mess of angels, and a few angel groups). Exactly 1 asked for a business plan and they were the lowest quality entity with the least success/experience.

Fred Wilson (one of the top consumer VCs in the world) said that 17 out of 26 of his "successful" investments (with exits) utterly changed their business model between investment and exit. In other words, a business plan has a roughly 60% chance of being obsolete.

Planning is good. You should rough out some numbers. Build a spreadsheet or two. If it's ad supported, get a sense of CPMs in your market and try to figure out how many ad views you'd need to support a real business. If it's a B2B offering, rough out what you can charge, investigate low cost distribution angles (SEO, SEM, etc). In short, prove to yourself (and others) that your business has some legs to stand on.

Write this down in an executive summary and be able to talk about it in some more detail... But writing a formal business plan? Chances are you don't know what business you're really in yet. And if you think you do, there are pretty good odds that you're wrong.

Of course, if you have a mature startup (a year or two old, a pile of customers), then some more structured planning might be appropriate.

What are the top 3 things you'd want to have handy in Excel when you sat down to a second meeting with a strong-sounding investor, webwright?

I didn't have any spreadsheets handy, but I think the best spreadsheet you could have would be growth/traction data rather than prognostication. Without _some_ traction (or a gold plated team), I think fundraising for web startups is a waste of time for the most part. I think the data you should have at your fingertips varies wildly based on what biz you're in and how mature your business is, but off the cuff, I think you should be able to answer (with some supporting wag numbers):

- How are you going to make money? What if that revenue model doesn't bear fruit... any other ideas?

- How are you going to reach your customers? How much will it cost to reach your customers?

- Roughly, how big is your market? Is there a lot of demand?

- How big a team do you need to test your initial theories and roughly how expensive is that going to be?

- Are there any other significant expenses aside from people?

- How many sales/pageviews/whatever would it take for you to be cash flow positive?

I don't good investors ask these questions to test your planning powers... I think they ask them to test how smart you are and how much you've thought about this stuff.

You do realize that these answers you suggest people should have amount to a business plan?

No, I don't realize that. Go read a book on writing a business plan. :-) Seriously, though-- there's a lot more to a formal biz plan than that.

Being able to toss out some ideas on distribution/marketing is different than having a 2 page section on marketing. Being able to say that you need two more devs to build what you think you need to build in the next 12 months is different from having a 4-stage hiring plan with assorted milestones. Tossing out some ways you could make money is different than a 5-year revenue projection.

I don't think those questions aren't asked because you should have a confident answer to any/all of them. They are asked to confirm that actually think about the issues in question.

It's like agile development vs. waterfall development, IMO.

It's only on YC News that business plans are so black and white. The is no international standard on what sections, how many pages, or how many years into the future a business plan must be.

The word "document" is clearly implied in this discussion, but is obviously causing a lot of confusion.

The purpose of a business plan is to show that you've given some thought to how you'll run and grow the business. Anyone who thinks that's an exercise in futility will have a hard time getting funding.

If you have an idiot investor, sure they might be pissed at you because of missed quotas, but you can also use them to look at your cash flow. If miss my Q4 quota by 30%, does that cause me to go bankrupt in Q2 this year? If I've spend the time setting up a cash flow budget, I'll know ahead of time, and can plan accordingly, if not, some day you're just going to hit a wall.

A business plan is basically a collection of things that are pretty smart to think about and write down. Things can change, and should change, but that is also easier with a business plan - you'll update it, and that'll give you an idea what else you need to change to accommodate the new environment.

Taking things as they come may work reasonably well for a 1-2 person setup, paying the bills with on-the-side consulting, hoping to go bootstrapped some time, but once someone is ready to dump real money in your lap, I'd be very hesitant about anyone being quite so lax about the sense in putting to paper what you're going to do with that money, and how the investor can hope to get paid.

Everyone has different experiences and needs, but I'll tell you my experience:

1) Most investors of internet startups don't ask to see a business plan. Maybe half want a short (1-2 page) narrative about the business-- an executive summary.

2) I've written formal business plans for two businesses in the past and they sat on the shelf collecting dust thereafter. In 6 months they were sorta obsolete. In 12 months they were freakin' hilariously wrong. New companies change to fast to do that much formal planning.

A good investor will recognize that. They won't ask for a business plan-- but they will ask a bunch of hard questions to make sure you've thought about the important issues.

The purpose of part of the business plan is to show that you've given thought. A business plan is basically a collection of things that are pretty smart to think about and write down, plus a whole bunch of other crap you pulled out of your ass to try to impress investors. Smart investors have their own ass from which to pull numbers.

I know lots of people who got funding with no business plan, in fact few tech companies have them at all anymore. Giving thought to what you're doing does not necessitate a business plan.

Rather than making you waste days or weeks of your time writing one, smart investors simply ask you all of the key questions. Who are your competitors and how can you differentiate was asked in every meeting I've ever been to. I couldn't have raised funding once, let alone the multiple times we have, without having given thought to that and being able to answer.

> Giving thought to what you're doing does not necessitate a business plan.

No, it IS a business plan, just not written down. It's not a given that a business plan need to have 15 pages of black magic numbers pulled out of anyones ass.

"I know lots of people who got funding with no business plan"

I don't dispute your experience but would caution that 2005-2008 may not be a guide for 2009-2012

Tech investors don't ask for business plans because they know they're worthless. In fact, they're worse than worthless, they're a possible negative indicator of success. If anything, they've been burned by the companies that did have them. Polished MBAs with great business plans start stuff like Pets.com and GovWorks. Nerds with no business plans start Google.

I just took a 10 week entrepreneur course called FastTrac, there are many local versions of the course throughout the US. I took a version in NYC. The course met once a week for 3 hours and was a great networking and social gathering. It was taught by a Professor at Fordham University who has his own startup company and used to be a VC.

The goal of the course was to teach you how to run a business and complete a working business plan after 10 weeks. Each class had a guest speaker and round table discussions. They focused on a different topic every week: market research, sales, accounting, legal needs, financial projections. I highly recommend the course if you want a crash course in how to write a business plan.

A related question, how much is a reasonable salary for a startup founder? Do investors usually assume the founders will be living in squalor, eating noodles and paying themselves nothing until profitability, or are investors usually open to founders that have existing financial commitments - family, mortgage etc.

Probably varies massively, but I've often assumed that investment often requires you don't take a salary, or very much at all anyway.

Austin Hill @ StartupEmpire in Toronto suggested that a reasonable VC-funded startup salary is based on needs rather than competitive salary. E.g. living expenses + a little, which means more $ for a CEO with a family & mortgage and less for a 22-year-old. He pointed out that you don't want to starve the CEO or force them to live in squalor because it's just not productive, e.g. the CEO needs to be able to rest well and stay healthy. Some VCs also tossed out $90k-$150k as reasonable salary once the company is able to self-fund that.

I have a lot of friends that are in or have been through A-round-funded startups, and I've been through several myself. All of them took market-rate salaries. I worked a year without salary to start a company in '99, but all three of us took market salaries (over my objection, which I'm now happy wasn't honored) when we closed the first round.

Your in an interesting, slightly unusual position here. That is, the investors have approached you, rather than vice versea. Business plans are normally written for a more general audience - I would find out more about these guys' other investments and see what makes them tick, and weight the business plan towards those interests. This may sound a little manipulative, but as some of the other posts have pointed out, a business plan is a fundamentally an investment-raising document, and in the medium term often has little relevance for the running of the company. But of course you should take a salary, it would seem unprofessional not to.

I wonder if Chad and Steve from YouTube had a business plan, or Craig Newmark, or Steve Jobs ?

Don't write a business plan.

Instead spend the time you would have spent on the plan putting together a kickass demo, or working on the product.

Having been approached, you're operating from a position of strength already. You should work that to your advantage - if you don't need the money then you can afford to negotiate more on your own terms.

If some documentation is required put together a Powerpoint of 5-10 slides explaining:

- Your product, and why it is unique (and defensible to competition)

- Your team's credentials and experience

- Your market, it's size

- Your competitors (including SWOT analysis)

- Your funding requirements (including salary)

- Your best and worst case scenarios for growth

Chad said at a dinner that when he and Steve made the rounds on Sand Hill road, they had a working product, and users to prove their idea was good. They didn't bring a business plan or any fancy presentations.

hmm...I'm not sure Chad Hurley's case is a good example because he had some excellent connections. His father-in-law is Jim Clark of Netscape/SGI fame. I'm sure that helped open doors, and let them be taken more seriously.

Good business plans are tough. I was taught at Northwestern by a very successful entrepreneur how to build the presentation, business plan, and financial model.

You need to cover the basics. Here's what my last one covered:

- Executive Summary

- Project Information

- Company Description

- Market and Industry Analysis

- Marketing and Sales

- Operations

- Management

- Capitalization and Structure

- Development and Milestones

- Financial Projections and Models

- Summary and Conclusion

It's no easy matter. This was a 30 page plan. I'd love to talk about the breakdown via IM or skype; it's just too much information to put into one comment.

I for one would be interested in a write-up/HN submission.

Has a 30 page business plan ever directly helped a company you worked on? I'm not challenging you, I'm genuinely interested.

It helps get money, period. I organize things via basecamp and wikis, not by a business plan.

Business plans are a VC marketing tool for me.

TicketStumbler is my third business and the closest thing I've ever done to a business plan is the YC application form. Know what problem you're solving, why you're solving it, who has this problem, how you're going to solve it and (maybe) monetization options.

I think a business plan could be important if you're looking to take gobs of money, but your query makes it sound like the investors are angels. Maybe providing more details would help everyone provide further feedback?

John Nesheim sells an Excel spreadsheet ($25) for creating financial projections. My background doesn't include accounting so it was a big help, factoring in many things I wouldn't have thought to put in our plan. I used it successfully to raise my first round of funding.


(The financial projections are just one component of your business plan, of course.)

I think that depends on if you need the salary for the timeframe in your plan. The investors want to make sure you'll be around to see the startup succeed so unless you're independently wealthy (or at least have enough to cover yourself for a few years) I'd include it.

Your salary should be basic, covering your costs and giving you a bit of spending money. This assumes you're working full time for the startup. Remember that the bigger picture is equity.

Some good tips here: http://blog.guykawasaki.com/2007/07/how-to-write-a-.html

Whatever you do don't spend a month writing a 60 page document. Keep it short and sweet. Use lots of bullet points / bold highlighting to ease readability. No complex multi-idea paragraphs. And most of all, just answer the key questions.

Good luck.

Do we believe Kawasaki on this one? He says, paraphrasing, "a pitch is a great communication tool, but no substitute for a plan", which he says you should write in 12 point type for people over 50. I feel like webwright at least would contradict this advice.

Business plan is the biggest piece of bull crap. You should know your business or do whatever it takes to learn it and persist - that is the only thing that is required and a smart investor will get that and ask the right questions.

Still, write it if you think that it will get you the money and then promptly discard it, or better still ask them to write it - obviously if they understand enough they should rely on their numbers more than anyone elses.

If they say that your business plan is not good enough, ask them to shove it up their sorry ass.

I'd start by getting the budget and forecast together, and then write the executive review. Get some feedback on it, and then pass it to the investors.

Go from there. You'll get an idea from the feedback and from what the investors say to know if you should proceed writing the entire plan, maybe they will find some holes in it, etc. etc. Then if they still want the full plan in writing, go write it. You'll probably learn a ton just in the process of writing the executive review.

I'll second mattmaroon's comments and say that you're probably barking up the wrong tree. You should try to self-finance or go after love-money (family and friends) first. Once you have traction and revenue a commercial or short-form business plan might make more sense - until then it's all wishful thinking.

With that said I have found SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis to be a useful tool...


To clarify, I work for a software consulting company. The potential investors would be the directors of this company. They themselves, have sold a startup for millions... What would u do?

Is your website http://www.sendible.com/ (your first HN submission and the only one that isn't a question)?

> I've been approached by some investors who want to invest in my startup. They've asked me to put together a business plan - listing costs/revenue etc.

Are said investors paying enough for what they want? Or, would you be better off doing something else?

I'm assuming that you have enough of a plan to run your biz and enough accounting to know what's happened in the past.

If that information is not what they want (and "not what they want" includes "we need it in a different format") or they don't understand what you've got (assuming that you're willing to share a redacted version), why do you want them as investors?

Instead of writing a full-on business plan, which is a huge waste of time, consider coming back to them with a set of spreadsheets. I've had to do business planning work for products I managed, and what the CEOs wanted was Excel. You might look more professional for not coming to them with a three-ring binder.

With that said, and with the huge caveat that while I've done this before, my advice might not be the current hotness:

(.) You need a table for revenue growth, quarter by quarter, in your case probably based on users and conversion rate scenarios.

(.) You might consider a seperate table for pricing; of all the things you write in the plan, pricing is the most likely to change, but do a couple scenarios, keep conversion/close rate in mind.

(.) If it makes sense for your product, segment the market and get that in a table; you might do, "home office", "small business", "enterprise", and have a pricing/phase-1/phase-2 revenue scenario for each model customer based on your pricing. Include a SWAG total addressable market size (there are, say, 2000-4000 "enterprises" to sell to).

(.) You can do a schedule table, quarter by quarter, and use it to set a conversion rate for each market segment, to chart featuresets in your product, when they'll be released, and what releasing them will do to your cash flow.

(.) If you have significant marketing expenses, break them down into line items quarter by quarter, showing some things kicking in later. You can break this down by outreach mechanism (direct mail, blogging, AdWords, research).

(.) You need a table for headcount; we just SWAG a common (somewhat lowball) fully loaded cost for everyone from management to QA; remember fully loaded adds (say) 30% for taxes, health insurance, and equipment/office/overhead.

(.) You need a table for all your expenses, quarter by quarter, which should include headcount, a line item for hosting/bandwidth/server/etc, marketing,

(.) I'm probably missing something, but with all that, you should be able to do a final seperate sheet, call it "use of proceeds", broken down by engineering, opex (hosting etc), sales, and administrative costs, quarter by quarter, against revenue.

Of all the things you "plan" now, pricing is the most likely to change, so don't get too hung up.

Lowball your headcount. Don't include anything you could reasonably outsource (like accounting, HR, graphic design).

Do you want to take a salary? What I think is, lots and lots of people pitch investors saying they'll forego salary; it's a cliche. You might look more serious if you're up front.

This is all going to sound over the top, and that's because it is, but on the other hand you're not going to do any of these things (price a product, figure out how many people to hire next month, allocate dollars to anything but AdWords) without these spreadsheets. A bunch of this stuff is optional (don't do a marketing plan if your marketing plan isn't crucial; maybe don't do a product schedule if long term product vision isn't a huge part of your pitch --- the schedule will embarass you 2 months from now).

Business Plan Pro is AMAZING :-)

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