Putting the P2P in Your Internet Business Plan
by Al Lierman
For a time, it seemed that business plans, especially Internet business plans, needed only a cute dot com name and a forecast of heavy site traffic and user registrations to successfully obtain funding. IPOs were wildly successful, especially those of businesses with the much-ballyhooed first mover advantage, or those that burned gobs of cash on Super Bowl ads or other expensive and futile attempts at brand building.
Then, in April of 2000, the market finally took a cold shower, drank some black coffee, and began to punish those dot coms that showed no profits - and perhaps more importantly - no clear path to profitability, or P2P. But it is not just the NASDAQ that has sobered up; venture capitalists and angel investors have also become more cautious and selective about the entrepreneurs on whom they choose to bestow their cash.
If you are looking to raise capital for a new venture these days you had better put the P2P in your BP. And we are not talking about P2P as in "peer-to-peer" computing. That is a topic for another day. Indeed, that P2P has had its fifteen minutes of fame on the VC stage, and the world still awaits the peer-to-peer business model that demonstrates the other P2P, Path to Profitability, the topic of this article. I suppose you could really make a killing if you developed a profitable peer-to-peer computing business, which I guess we would have to call the P2PP2P, or P2P squared. Ah, the New Economy, ain't it grand?
Maybe you are wondering why we needed a new buzzword for an old idea. Let's face it: showing how and when your business will become profitable in your business plan is not exactly a new concept. Granted, it might be the return of an old concept that some of us had forgotten for a time, but new? No.
Any good business plan should explain to its reader how the company will make money and when it will do so. If the plan is to have credibility - and that is the goal after all - the time it will take for the company to show a profit must be reasonable. What is reasonable? The answer to that question will depend to some extent on the type of business. A technology company that needs to spend millions on infrastructure before it can even begin to attract customers will take longer to reach breakeven than a small business selling t-shirts online.
Generally speaking, an experienced investor will cast a dubious eye on an Income Statement that shows profitability before the end of the company's second year of operation. (It is arguable that investors are doubtful of any financial projections they read in business plans.) That is not to say that a company cannot be profitable earlier; it may well be. The point is to convince the reader of your plan that you are a clear-thinking, seasoned entrepreneur who understands the time and effort it takes to get a new venture off the ground. In real life, the average company does not turn a profit before the end of its second year in business. It is all right for you to project that yours won't either.
Where in your business plan should you talk about the path to profitability? You should do so at least briefly in the Executive Summary. You never want make an investor read too far into a plan to determine when and how he will realize a profit from his investment. You are not a mystery writer, you get no extra credit for building suspense. You don't need to go into much detail about finances in the Executive Summary. Simple statements such as "The Company will achieve profitability early in Year 3," or "In year 2 the Company will reach its breakeven sales level of $1,000,000," are fine.
You also want to show the net income numbers in the financial section of the plan. Be sure to preface your financial statements with at least a brief narrative describing the important assumptions inherent in your forecasts as well as the potential risks. A standard income statement, even an abbreviated one, should always be included in the financial section of the business plan. It ought to reflect a minimum of three years of projections. This is where your reader will go if he wants details about your financial projections and assumptions.
© Alfred A. Lierman, President/CEO Planigent. Reprints only with permission and with author reference and all links intact.