The First Rule of Business: Have a Plan
There is an old maxim that states "if you don't know where you're going, any road will take you there." There should be a corollary to that for the telecom industry: "If you don't know where you're going, the answer is: out of business."
The recent downturn in the telecom sector has shown the importance of a sound business plan as the foundation for a well-executed venture. The 1996 Telecommunications Act created an environment ripe for innovation and competition. Hundreds of new entrants dove in to various segments of the industry. Many investors created rapid wealth and liquidity as initial venture capital (VC) funding teed-up a rapid succession of initial public offerings (IPOs). The VCs garnered returns by cashing out in the public markets, and early public investors enjoyed unprecedented returns on investment.
Sometime during these heady days, investors--both public and private--began to focus more on this highly profitable IFO process than on the underlying fundamentals of the businesses involved. These kinds of short-term market bubbles always correct themselves, and the last round of hype was no exception. In truth, value ultimately is created by cash flow, and cash flow is the end result of a well-thought-out and well-executed business plan.
The tightening of the capital markets is making life difficult for the "growth at any cost" variety of new market entrants. Many telecommunications companies spent millions deploying switches and other network elements, but failed to consider the true market opportunity in the areas they served. As a result, we have seen many new entrants reporting revenue and customer shortfalls in recent quarters. Many also are discovering they significantly underestimated the time and resources required to build the operational infrastructure. In fact, setting up the back office and billing often is one of those "devil in the details" gotchas inherent in startup companies.
The stakes are particularly high in the telecommunications industry, where new companies must invest millions--or billions--deploying their networks. Once the money has been spent on the network, companies need to attract customers in a highly competitive environment. Whether it is your money on the line or that of your investors, you need to produce a satisfactory return on investment, which takes us back to the importance of a sound business plan.
So what are the elements of a business plan? In this article, we will discuss the components of a formal business plan. That is, a plan formatted for the purpose of attracting external investment dollars to fund your venture.
Taking the Right Steps
1) STATE THE BUSINESS OBJECTIVE
All business plans should begin with an overview of the business and the opportunity it presents. Think of this in terms of how you would describe your business to someone you just met who has little or no knowledge of the industry. As a beginning, this part of the plan sets the stage for what is to follow. It should be engaging, without overstating the opportunity. It should leave the audience intrigued enough to read on.
2) OUTLINE THE MARKETING APPROACH
If you successfully engaged readers in the previous section, they will be interested in the scope of the opportunity and the marketing tactics to be used. Any discussion of market potential should be supported with market research. A great deal of information generally is available publicly. However, key data, such as local market segment opportunities and factors important to target customer segments typically must be identified by customized market research initiatives.
Begin by addressing the size of the market involved. Will your business be local, regional, national or global in scope? Who is the competition? Who are your customers? How will you reach them? This process helps to define the business opportunity and the revenue potential.
Next, identify what is unique about your company and its position in the market. What differentiates it from the competition? What is its strategic advantage? Are these differentiators supported by market research? What barriers to entry (if any) exist that might prevent or delay a potential competitor from executing a similar business plan? These are critical questions that support the market penetration assumptions of the financial model.
After that, discuss how your company will be going to market, its distribution strategy and price points. This would be a good time to address forecasted customer-acquisition expense and anticipated gross margins.
Once you have laid out the full potential of your planned enterprise, it is important to assess the risks associated with the plan. A thorough understanding of business risks at the plan stage serves two purposes. First, it shows potential investors you have diligently thought through the challenges that must be overcome in the successful execution of the plan. Second, by identifying the risks up front, you are increasing your chances of success.
Examples of risks consist of a detailed analysis of the competition and the anticipated competitive response. Other risks include changes and uncertainty in the regulatory environment, the company's ability to attract and retain talented employees, and even the stability of the underlying technology companies that provide crucial network components. The level of reliance on external funding sources during periods of negative cash flow is a risk that also must be evaluated.
3) SELL THE MANAGEMENT
Now that the market opportunity has been laid out, the credibility of the company's management must be addressed. Who are they? What is their background and what makes them qualified to execute the plan? The objective of this section is to give investors the confidence that your management team will maximize the probability of the business' success, and with it secure the required return on investment.
4) DEFINE THE NETWORK AND TECHNOLOGY PLATFORM
Telecom-related business plans often are capital intensive. That is, the majority of the required funding will be spent on network infrastructure. This investment will play the primary role in determining your businesses' underlying cost structure.
Companies with efficient network topologies will have lower overall network-related costs and likely will have a competitive advantage in the marketplace, at least from a pricing standpoint.
However, investors also want assurances that the technology you intend to deploy is available and proven to work. Clearly, a company with a low-cost infrastructure and low quality of service (QOS) will have little success retaining its customers. It is important to articulate why the network topology you have chosen is the best for the business.
If you already have chosen specific vendors, show that they are viable companies. Discuss their financial stability and their senior management.
Finally the plan needs to speak to your company's deployment timeframes and the timing of capital expenditures. As with any element of the overall business plan, the timing of the network deployment must be realistic. Missing overly optimistic deployment assumptions snowballs into missed revenue performance and customer-acquisition shortfalls.
5) DISCUSS BACK-OFFICE OPERATIONS
The humdrum elements of the day-to-day back office frequently are glossed over in business plans. This is a mistake. The back office, after all, is where execution of the business takes place. You can have the best marketing plan and sales force in the industry, but if you cannot bill and collect, your business won't last long. At the plan stage, you likely will not yet have identified your billing and accounting systems or network operation center configuration. Nevertheless, you can forecast costs and speak to the complexities and timeframes associated with these initiatives.
6) PRESENT THE FINANCIAL MODEL
The financial model must be consistent with the other elements of the plan. Indeed, the financial plan is simply the numerical expression of the written plan. The financial model must include an assumption set, and a five- to 10-year forecast of your income statement, balance sheet and cash flow It is important that the model present a conservative, or most likely scenario, because the financial model typically serves as the basis of investor performance expectations. From a funding standpoint, the financial model typically drives any debt-related performance covenants.
In a telephone-company owned business venture, a primary vendor for services may be the parent company It often is helpful in selling a plan internally to quantify such inter-company charges.
7) FUNDING THE PLAN
The financial model will identify the amount and timing of monies required to fund the business initiative. Typically, funding will occur in stages. Early stage private funding may come from "angel" investors or venture capitalists. Later stages include subsequent venture capitalist rounds, IPOs and private placements. Debt may be obtained from various banks and vendor financing.
When to Develop a Plan
The best time to create a business plan is at the onset of the enterprise. It is vital in the beginning of any venture to articulate its reason for being. The business plan sets your company's tone and priorities and forces you to consider opportunities and risks, critical elements at any stage in a business' life.
Your business plan should be a living document. For your business to remain vital and relevant, the plan must evolve whenever material conditions change.