An experienced tech entrepreneur commented to me that there is no need to prepare a business plan to start a business. I cannot dispute that comment. Anyone can start any business if that person has the inclination or can fund the enterprise. But any new venture can be risky if that person has not prepared for the contingencies that can go wrong. There are two major constraints to that model: economics of capital and time. And the best way to handle those constraints is to include milestones that breakdown alternate strategies whenever the targets have not been reached.
Any business being founded must have sufficient return on capital that makes it Economic Value Added (EVA) positive, or, in other words, given the cost of capital and the alternatives in which that capital can be employed, that the enterprise must have a higher return. Otherwise, why bother starting the enterprise?
As an example, if the individual has $100,000, he or she can elect to invest that money in real estate with a theoretical return of 10%, instead of starting a business that has a return of 5%. And, if that individual borrows that capital at the cost of 4% annually, any investment needs to exceed 4% to increase the value of that investment. From the instant example, it pays to invest in the real estate over starting the business.
Any business operates over time. A return is measured also by the increase/decrease of the value of money over time. And that time measurement is broken down into months, quarters, and years. And anyone can gauge the performance using the same time parameters.
In my standard business strategy draft, I not only include my main strategy but also an alternate strategy. The alternate strategy kicks in whenever some milestone is not reached. Within the strategic parameters, I include descriptions as to tactics that include everything from advertising and Salesforce.
However, I have met successful entrepreneurs who, in their desire to achieve an IPO, believe that prior to beginning their business, they all employ a business plan to outline the final objectives of their business. That strategy is malleable with the milestone inclusion.
Any business plan must have milestones. Without those milestones, one cannot measure the success of the plan in the medium term. And if the milestones are not met, then the senior manager must analyze the reasons for the discrepancies, and make the adjustments whether in the product, marketing, or distributions in order to meet the new milestones.
I hark back to my American football analogy. My QB son’s team was ten yards away from the goal line. Twice the team tried to run the ball. And twice the team was pushed back by the defensive line. The milestone here is simple: reach the end zone after 3 attempts. However, if the initial two attempts fail, try something else. In the case of the football team, the QB tossed the ball to a receiver for its third try and got his touchdown.
Now, have I observed companies not change their strategy after the first two attempts? The answer is yes. I met with the CEO and interim president of a startup telecom company in Virginia. With substantial $10 million funding, the company hired over 200 salespeople to sell the technology to its target market — major telecom manufacturers. Unfortunately, the sales had been meager after 6 months. Instead of re-evaluating its target market or its overall marketing scheme, the company kept pushing the same sales program until its funding ran out. The company closed its doors after 18 months. I noted that the company had identified the wrong target customers, and should have realigned its salesforce into a new direction. But it never did. And suffered a bankruptcy from its intransigence.
The milestone philosophy is cold hearted: it challenges the egos of the initial authors to the company’s strategy while senior managers must swallow their pride and redirect the company’s resources into another direction. Yet, the name of the game of any business is survival and long term success. As I pointed out to the tech entrepreneur in our discussions, the founder of Starbucks admitted in his biography, that he restructured the coffee shop formula with several iterations into one format that worked. Even the venerable Bill Gates admits in his biography that the MS-DOS delivered to IBM had been acquired from another company when Microsoft’s operating system didn’t perform as well. Mr. Gates had a deadline and he had to deliver. And long term strategic success cannot be reached without the implementation of milestones.