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Stand by Your (Business) Plan

Becoming a contract developer or a development team is not a decision to be taken lightly, and business plans are essential. A business plan can help you determine what you are and what you want to be. When you are faced with opportunity, it helps you decide how to take advantage of it. The business plan can be a living guide for your future.

jessee allread, Blogger

May 21, 1999

13 Min Read

Some companies start with a plan, some start with just an idea. Ideas, however, are not enough to ensure success; you have to plan to be successful. I frequently get asked to find money to fund companies with great ideas. Two companies with which I have been associated — both with excellent products — had very different reactions to opportunities. One company was headed by an inventor with several concepts and demonstrable products; the other was a games company with a finished game. Each company had a clear vision of what they wanted to be, but neither had articulated exactly what they currently were!

My role for each company was to introduce them to potential business partners which could help provide a suitable buying audience for their products. After many meetings with potential partners, one company had a deal on the table and the other didn't. Can you guess which company is no longer with us? — the game company.

I found an appropriate publisher for the game company, but the developers wanted more money than the publisher was willing to offer. They had skin in the game, their management was O.K., the product was great. (My kids still play the game.) The problem? They thought they were worth more than what the publisher was willing to pay.

They had had no success as a team. They didn't collaborate with a publisher during the development of their product, they had produced a product that didn't fit into a particular category, no buyer was given an opportunity to review its development prior to completion, and, most importantly, the company had an incomplete understanding of where they fit in the market. Yet, they wanted to be successful before they had proven themselves. As hard as it is to accept, there are times when you must take less than you know you're worth to get in the correct door. It's called paying your dues.

Meanwhile, the inventor’s company made presentations that went well, but the product was too far ahead of its time. We learned this during each presentation and in post-meeting debriefings. As such, the product has been temporarily shelved. Fortunately, the company’s business plan allowed for the failure of one invention or another. This company succeeded because it developed flexibility within its business plan and applied that to its business.

The Basics

Regardless of the business you're in, there are fundamentals and essentials. You must be able to determine the cost of your operation. You need to bring in enough income. You need to develop a plan for growth. What happens when you are involved with one project and another project presents itself? You must be able to determine the cost of this new opportunity. Should you turn down this new business? Can you afford to? Can you give the necessary attention to your current assignment and accept more business? You have to know and grow your business wisely. The balance between success and failure can be a fine line.

You should ask all of these questions when you are in the idea stage of building your business. One common statement I hear is, "I can't take on any more work at this time." To succeed, you must build a plan that enables you to decide whether or not you take on more business or turn it away. Without a plan, you increase the risk of making a poor business decision. A business plan will not eliminate these risks, but it will reduce them.

Imagine a McDonalds employee saying to a person in line, "Excuse me sir, you’ll have to come back next week, because we don't have enough people in the restaurant to wait on you." Or, "Sorry, you can't have a burger, we ran out." It seems ridiculous. But, the same rules apply to your operation. How do you satisfy a customer’s needs? The best-run companies are those that ensure all employees are knowledgeable about all facets of the company’s operation and how their role contributes to its overall success. If you don't understand how you fit in, you can’t value your contribution to the big picture. This requires a plan.

Becoming a contract developer or a development team is not a decision to be taken lightly. If you want to remain small and independent, this becomes a critical decision. What happens if you land a job that requires hiring several temps to complete a variety of projects? All of a sudden you are faced with management and control issues, when all you really wanted was to be was a lone ranger. Should you pass up the opportunity?

That's where the business plan comes into play. It can help you determine what you are and what you want to be. When you are faced with opportunity, it helps you decide how to take advantage of it. The business plan can be a living guide for your future.

Some people develop business plans to guide them through formation and management issues. Others write them to fund companies. Readers of business plans use them to look into the mind of its creator and to see if key components of a successful business have been included. You don't have to be a good writer to produce a plan that gets funded. Most venture capitalists are interested in your idea, the process of the plan, and you.

Therefore, you must be able to build a business structure that is easily understood by outsiders. Once the structure is in place, there are several key components that you need to add as time passes and as growth and success begin.

I'll assume you are capable of producing something someone either wants to buy or is persuaded to buy. This may be outsourced programming skills that allow you to work independently from home, or the ability to create a series of game titles. Whatever the scenario, you need a plan.

Your product has a cost of goods (even if the cost is your salary). You need to understand that cost, as well as other component costs necessary to run a business. What is the raw cost of the product? What does it cost the competition to produce the product? Can the product be enhanced? Will the enhancement be required because of competitive pressures: price, channel, availability, delivery?

Once you determine the cost of you product (or service), you have to determine how you will receive revenue for the product. In the case of a person or project, you need to develop a scope of work, a set of deliverables, and understand the time required to complete the work. These three components should enable you to determine compensation. Since you already know the cost of the product and the time needed to complete the work, you now have to build in a profit margin. What are the current market rates, what do others charge, how does your product or service vary from the others available, and can you charge more? You have to take into account all of these issues.

Once you're satisfied that you have a saleable product or service, you need to be able to sell as many as you can produce. If you are a single programmer/developer with a single job, you may feel you can’t start another job until you've finished the first one. Not so. If you have determined the cost of the product, you need to determine how you replicate that product. You need this information in advance of the next job or opportunity. How do you manufacture your product or service? It only takes money, planning and time. As long as there is an interest (market) for your product or service, you will need to increase its reach.

The Business Plan

You may already have a "business plan." It may be an unwritten understanding of what you do. It may be a goal you'd like to reach. It could be your sound bite. However, think of your business plan as an insurance policy. By writing a plan, you have protected yourself if and when things get tough. The plan provides flexibility that will help you anticipate market changes. The business plan has several components: First, you need a mission statement. This is a brief statement about what you do. I am a business development consultant. My mission statement is, "Provide Access and Experience." It's also my sound bite. A typical mission statement is a short paragraph describing what the company does. Second, you need a goal. Yours might be, "To Become the Preeminent RPG Developer." And, you need a set of pre-defined components that our industry requires in a business plan.

The speed at which the technology industry is currently running, a business plan developed today will be very different in a year's time. Your business and revenue models need to keep pace with the market; the plan needs periodic review. Are you meeting your goals? Have you changed your mission without addressing the impact it has on your business? Any changes should be made within the overall context of the business plan.

The Management Team

At a minimum, you need an advisory board. It can be as simple as your spouse or as robust as you feel capable of managing. Your board should consist of a group of professional acquaintances that you have developed over time. It may include a mentor, an old boss, and your banker, or anyone who will be a valuable asset to your business. These people need to care for you and your business and be able to supply you with feedback and skill sets that compliment yours.

The Value Proposition

Why would anyone pay for your product or services? A key part of your success will be your ability to describe the value you bring to a relationship. Your experience, insight and capabilities must provide a faster means to success than your competitor. Your technology or product must demonstrably reach a market no other product or service has reached to date. The investment any partner makes in you will be based on whether or not they understand and believe your differentiation.

Return on Investment

This is the big one. To get buy-off from anyone associated with your efforts, you must be able to describe the end game. A potential employee, customer, partner or investor's decision to be a part of your organization will be based on the return on investment (ROI). Each will be asking the questions, "Will I get a bigger return with this investment (of time or money) than that one?" "Who will take a chance on you and why?" ROI is your ability to solve someone's problem and have it cost less than its worth to solve. Breaking even is interesting, but making millions with an IPO satisfies a different itch. Each requires an investigation of whether or not the cost of your effort will result in a return on the investment of time and money.

To investigate this measurement properly, you need to create business, revenue and financial models that will enable you, and those involved with you, to understand whether or not there is a return and how large it might be. A simple business model might be work-for-hire programming and the revenue model may be a per hour calculation. The financial model will be a factor of how many jobs at how many hours per job times the numbers of programmers less the cost of operation. When you begin to investigate whether or not this model will work, you need to know the market demand for these services, the competitive landscape and whether or not you can charge more for your services than it costs to perform them. The size of this difference is the return on your investment. Use common sense; if the difference it isn't enough to excite you, why would it excite an outsider?

The Money

How will you finance your development? How will you pay yourself and your team? How will you manage expenses? Why do you need the money? If you want someone to fund your effort, you must be able to describe why they aren't just paying you a salary. Reduce their risk.

Your plan has to address all of these issues and more. Your skin in the game and your ability to create a revenue stream greatly improves the chance of an investment. Smart Money is a partner that will bring more than money to your relationship. If you are a developer in search of investment, have you developed a publishing or distribution partnership? If you ask a publisher to fund your development through advances against royalties or other company-starting devices, haven't you just asked that publisher to be something he's not? Would you ask a venture capitalist to distribute your title? Of course not. Then why ask a distributor to provide capital? Yes, we all know examples where a publisher or distributor has funded a project. Guess what? They did so to stimulate a market or to secure a highly sought-after property. These are exceptions. Successful businesses have cash flow — create some! You make something, someone buys it and someone else sees a financial opportunity in your business. You can get away with less in today's business climate but sooner or later your business has to make more money than it costs to run.

The Executive Summary

An Executive Summary is the last piece of the plan to be developed and is the most important. Typically an Exec Summ consists of two pages of tightly written information describing your mission statement, business and value proposition, management team, capital requirements, return on investment and exit strategy. Eliminate adjectives.

You build this document after the process of working through all the issues of your business plan. The Executive Summary is the culmination of your decision process. Its purpose is to offer a snapshot of understanding to partners or purchasers of your product or service. It can also be a capsule of knowledge for any press and public relations efforts that you may find necessary, for example when someone asks, "Hey, what do you do?"

The Exit Strategy

You may not know what your exit strategy is but you should understand the variety of exits available to you. Simply put, an exit strategy is how anyone with an investment in something gets that investment and more back. Think of this as your retirement. How do you stop working and maintain a paycheck? A venture capitalist only cares about his return on investment and how simply he can get a "Ten times investment" exit strategy within a reasonable timeframe. Your plan must include how you and your partners will cash out. Merger, acquisition, IPO, and outright sale are all exit strategies. Which is the best for you?

The Elevator Pitch

A guy in the elevator with you asks, "What do you do?" You have 20 seconds. Are you prepared to describe what you do succinctly and effectively? I was waiting at a red light at a recent trade show, when a business acquaintance started through the crosswalk. I said hello, he asked for a ride to his hotel, and I had a client in the car. Once the introductions were complete this publisher asked my client what he did. In less than 20 words, he nailed the landing. This opportunity resulted in a meeting and the discussion of pending title development. Your elevator pitch has only one goal: to deliver your message clearly anywhere, anytime. Once the bite is delivered, be prepared to respond to questions regarding your structure, relationships and history.

I hope that the strategies I've laid out above will help you transform your business from the idea stage into a successful reality. Hard work is only part of the story. It's just as important to concentrate your efforts on building a plan for your business that is both solid and flexible. When you do it right, you can use it to guide and grow your fledgling enterprise, and it will be with you every step of the way.

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About the Author(s)

jessee allread


Jessee Allread has been around the industry for almost two decades in various management roles. His monthly column will explore topics such as retail and Internet distribution strategies, selling your title, putting your company on the block, and other business concerns. If you would like to propose column topics or you have specific questions that you would like to see addressed in his column, he welcomes your input at [email protected].

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