New venture assessment: moving beyond business plans in introductory entrepreneurship courses.

New venture assessment: moving beyond business plans in introductory entrepreneurship courses. INTRODUCTION In nearly any course in entrepreneurship, the business plan is thetypical end-product. Students are expected to conduct a detailedanalysis of market characteristics, anticipated market share estimates,per unit costs, operating details down to employees and rates per hour,utilities, etc, all displayed in impressive, detailed Excel spreadsheetsof monthly, quarterly and annual financial pro forma statements. It is aformidable task and one in which students learn a great deal. Katz(2007) refers to this phenomenon as the 'ubiquitous businessplan'. However, not everyone has been happy with this emphasis,with some arguing it is misplaced (Timmons & Spinelli, 2007) andothers arguing that the content emphasis in most business plans is onthe wrong things (Sahlman, 1997). In this paper, we argue that a full business plan is not necessaryto fulfill the typical objectives in introductory entrepreneurshipcourses and that it actually may mislead students by communicating thatthere is only one best way to assess new ventures. We propose that a newventure assessment process will typically involve a series ofincreasingly complex decisions (and processes) as to venture viability,not simply the all-or-nothing evaluation implied in the business plan. The proposed process would involve a series of steps starting witha breakeven analysis and end with either a feasibility study or a fullbusiness plan depending on the course objectives. After demonstratingthe current importance of business planning in entrepreneurship andreviewing the limited literature related to this discussion, the paperoutlines six key dimensions to be used when talking about any businessassessment process and the resultant report or document produced. Next,these dimensions are used to suggest which of the four assessmentmethods (breakeven analysis, going concern analysis, and feasibilitystudy or business plan) is most appropriate for the evaluation beingconsidered. Finally, several issues are discussed as they pertain toteaching entrepreneurship, particularly as they relate to new ventureviability assessment required in most entrepreneurship courses. BACKGROUND In the last decade, more jobs have been created from new venturesthan have been lost in the national economy, resulting in increasedinterest in and demand for entrepreneurship training (Moutray, 2007).With the increasing growth of small business or entrepreneurship courseofferings in the United States and globally, the traditional businessplan has become a distinctive feature of these types of courses (Katz,2007). This emphasis on business plans is further evidenced by thepresence of dozens of competitive events, ranging from local tointernational business plan competitions (Small Business Notes, 2008).These competitions attract large corporate sponsors and direct supportfrom a variety of entrepreneurs and small businesses. Awards in thesecompetitions annually run into millions of dollars. While this clear interest in entrepreneurship can be seen aspositive, not everyone is convinced that the emphasis placed on thebusiness plan as the sole educational framework is appropriate. Sahlmanhas noted that "plans pour far too much ink on the numbers-and fartoo little on the information that really matters" (Sahlman, 1997).While there may be criticism of the business plan as the end all inentrepreneurship courses, no one is suggesting that assessing newventure viability should be ignored or that the business plan isobsolete. It is a question of suitability to task. A review of the literature on new venture viability assessmentrevealed little discussion of this process. While there are debatesreflected in the literature as to the value of business planning in newbusiness success (Bhide, 2000; Delmar & Shane, 2003), little wasfound that distinguished between levels of assessment or addressed themerits of different approaches to concept evaluation that could be usedin the entrepreneurial process. Gruber (2007) has suggested that undercertain conditions the entrepreneur should focus on different aspects ofa plan, opening up the possibility at least for consideration of othertools for making decisions. Recently, some attempts have been made bytextbook authors to discuss new venture assessment as a two-phaseprocess that includes a feasibility study and business plan (Barringer& Ireland, 2008; Katz & Green, 2007). A review of these textsreveals the difficulty of such discussions, as not only does each textdiffer as to what is included in a feasibility study versus a businessplan, but also what defines each. While our review found little direct discussion of interest in thebusiness literature, there were some examples in agricultural economics(Hofstrand & Holz-Clause, 2006) and engineeringrelated areas(Eschenbach, 1992). The feasibility studies in the engineering areaswere generally limited to capital expansions and projects withinexisting businesses. Here, too, the terminology used in the research wasinconsistent across disciplines. We observed that what was labeled afeasibility study might be more appropriately labeled a business plan(Justis & Kreigsman, 1979; Hofstrand & Holz-Clause, 2006).Further, there appears to be a bias in the business literature in favorof business plans as the only or best way to investigate businessconcept viability. Assessing new venture viability is a process involving a series ofassessments, with each succeeding assessment being more complex, andhopefully more informative, than the previous. This paper argues thatthe most complex of these assessments is the business plan, which in itsfullest form is more an executable operating plan than a study ofventure feasibility. Finally, this paper concludes that undergraduateentrepreneurship students may be better served by introducing them toalternatives to the full business plan. TYPE OF ASSESSMENT Using a four-stage model of assessment, we can better characterizethe process of evaluation as it progresses from very preliminary innature to fully developed operating plans. As the purpose for theassessment changes, the implications are reflected in the other fivedimensions of assessment. This model includes breakeven analysis, goingconcern, feasibility study, and the business plan. Each is discussedbelow. Breakeven Analysis Perhaps one of the more basic assessments of a business concept isthe breakeven analysis where basic assumptions as to variable and fixedcost behavior is estimated, revealing rough estimates as to revenuestreams necessary for the business to be viable. Typically, industrystatistics from the same or similar industries are used to gain anestimate of cost behavior relative to a given range of revenue.Frequently, the current academic practice is to develop breakevenestimates after the full business plan is complete. Not only is thisunnecessary, but it also diminishes the significance of the tool toprovide preliminary information as to concept viability as the businessplan has by this point fully detailed the performance expectations forthe new venture. Going Concern Also referred to as a 'steady state' pro forma, thisassessment fleshes out more of the operating details of the stabilizedbusiness. Hence, it is essentially focused on the P & L, as it willlook when the business is functioning at some typical or'normal' level. It will detail key revenue and expensecategories and reflect a snapshot of this future business. How far intothe future the snapshot is taken is not fixed and depends somewhat onthe type of business, but would be expected to reflect the operatingstatement in the 18 - 24 month range after start up. It estimates thefinancial implications under a given set of assumptions as to marketsize, penetration success and the expenses estimated to support thelevel of business anticipated. It is a picture based on an 'ifthings go a certain way, will it work out' scenario. Feasibility Study This assessment dials up the scrutiny of the assumptions andimplications using a combination of published data averages (such asRMA) and local market research. Market definition is further honed andcharacteristics of potential target groups are studied more carefully inorder to derive optimistic, mid-range, and pessimistic revenue scenariosfor the new venture. The emphasis then is heavily on business concept,products/services offered and the market it is to serve. Theimplications are reflected in three-year annual financial pro formastatements that would include the mid-range scenario of incomestatement, balance sheet and cash flows. Business Plan This reflects what we have characterized as the full-blownpre-launch operating plan for the business. It is the script forstarting the business and the details are further refined andexpectations as to performance are quite detailed. This plan wouldtypically provide 5 - 7 year pro forma statements, with month-to-monthincome statement and cash flow details for at least the first 12 monthsof operations, with quarterly statements for year two. With this background on assessment types, six dimensions areproposed that distinguish between these differing types of new ventureassessment. KEY DIMENSIONS OF NEW BUSINESS ASSESSMENT When assessing the merits of a new business idea or variations ofan existing one, the typical process results in a report that centers onthe economic value of the idea or concept. The format of the report asto content and depth depends on initial criteria established for theassessment. Earlystage assessments (e.g. a breakeven analysis or goingconcern) would not be expected to be as lengthy and detailed as would those later in the assessment process(e.g. a feasibility study with detailed financial projections and data).Further, a preliminary profit analysis would require much lessinformation and detail than would a comprehensive evaluation of aproposal from product concept to financial forecasts. A full operatingplan, here defined as a business plan, would call for even greaterdetail. A more systematic approach to differentiating various levels ofassessment follows. Six dimensions of new venture assessment areidentified and discussed. Discussed in turn, the dimensions are purpose,focus, depth of analysis, length of assessment, speed, and cost. Table 1below summarizes the application of these dimensions to the fourassessment types outlined earlier. Purpose Often referred to as a 'first pass' at a business plan,the purpose of a feasibility study is to make a series of increasinglymore careful and complex evaluations of a concept's viability,beginning with a basic cost-benefit analysis. Breakeven and goingconcern analyses would provide an early validation for this step. Thefocus in a feasibility study is on the product, customers, the industry,and the likelihood of successful entry by the new venture using theproposed model. A full-blown business plan (they vary in detail as well)is intended to not only confirm or disconfirm viability but to detailthe intended marketing, operational and financial activities that areneeded to make the business succeed in its specified market. That is,focus shifts more toward the operating plan details that will launch thebusiness. Focus The focus of the breakeven and going concern analyses, as well asthe feasibility study, is primarily on the business concept/businessmodel, evaluating the likelihood and degree of success possible in thetarget market. This means that little attention will be put onoperational details, assuming that these are resolvable through'typical' methodology and related costs. An exception to thisgeneralization might be when the operational details are truly unique,not typical, and likely a key motivation for the assessment to beginwith. On the other hand, the business plan attends to the full gamut ofissues associated with making a business operational and successful as agoing concern in a specific context. As much detail as necessary tosupport decision-making is built into the business plan in order to meetmanagement and investment decision requirements. Depth of Analysis Depth of analysis for the feasibility study is therefore selectiveand somewhat less detailed relative to the full business plan,particularly in operational and financial analysis. The feasibilitystudy concentrates on the "softer" but equally importantbusiness issues. In contrast, the business plan tends to incorporatemore hard detail and covers the full range of functional areas andissues involved in a business start up. Financial details in the breakeven and going concern analysis aresomewhat basic. The feasibility study typically provides no more thanthree years of pro forma projections and relies heavily on industryaverages for estimating these statements. They serve the primary purposeof demonstrating whether there are sufficient returns to investors underthe conditions defined to make the venture minimally attractive. The business plan most likely would include a minimum of five yearspro forma statements, with monthly and quarterly details for earlyperiods, and more care to 'localize' the statement details tothe specific context in which the business will operate. For example,whereas a feasibility study might use Robert Morris Annual StatementStudies (RMA), Bizstats.com, or other industry average sources toestimate operating expenses, the business plan would seek to specifyexpected expenses based on localized research built on thedifferentiating characteristics of the proposed venture. Other expandedoperating details would be included as well. The breakeven or going concern analysis and the feasibility studyformats make sensitivity analysis easier and allow the student to testkey assumptions more directly and with less effort than with a businessplan. Use of these less complex forms of analysis encourages students toconsider a broader range of possibilities in their analyses. An examplewould be the 'first pass' determination of market penetrationand regional scope requirements for viability of the venture. Can thebusiness survive at the local level or must it rapidly expand to theregional, national, or global level? Length of Assessment As one might reasonably expect from the foregoing discussion, thelength of the feasibility study is considerably shorter than thebusiness plan. Whereas a feasibility study would typically range from 5- 15 pages, excluding appendices, a business plan could easily exceed 25pages. Balancing brevity and thoroughness of detail is a key successfactor in a well-written business plan. Speed As to speed, breakeven and going concern analyses and feasibilitystudies are more quickly produced and thus tend to be the approach ofchoice when it comes to establishing initial merit of a business idea.It is possible that a more extensive study would be done as well, onewith higher quality assumptions and knowledge of fundamentals - andrequiring more time. A business plan logically would follow if thesefirst series of 'tests' meet threshold expectations and thebusiness or entrepreneur wishes to proceed to launch. Obviously, thebusiness plan would require additional time to accomplish, building onand refining the findings of the earlier feasibility study and fleshingout launch and operating details. Cost Cost is a key reason for initiating the assessment process with afeasibility study, coupled with the speed of getting an initialassessment of an idea. Typically, one might expect a feasibility studyto cost one-third to one-half as much as a full business assessment, andeven less than a full operating plan. In this instance, cost is not onlymeasured in dollars of direct expenditures on the assessment, but wouldencompass the broader issue of opportunity costs associated with anontimely response to an opportunity. Extensive evaluations that requiremonths of in-depth analysis may not be appropriate or permissible underhighly volatile and competitive environments. As can be seen in Table 1 below, the relationship between the fourassessment types is depicted on a continuum, where the purpose of thenew business assessment is the primary determinant of the remaining fivedimensions and drives the expectations of all involved in the process.As a continuum, a new venture assessment process would be expected toproceed through various phases along the "assessmentcontinuum" until a full business plan is developed for theprelaunch business. As a practical matter then, assessing viability would be expectedto include a number of assessment methods short of a detailed businessor operating plan. It is possible that a breakeven analysis, a verypreliminary assessment of a new product or venture, could be done in aslittle as a single page, recognizing the limitations of such a study. Orthe preliminary assessment could be done on a going concern basis withonly a moderate increase in effort and cost. The primary advantage ofsuch a short assessments is they are quick and provide a rough idea ofthe parameters for success. This approach is similar to the basicportfolio models used in strategic analysis, which serve as a screeningdevices for making initial assessments of business opportunities. Basicassessment methods serve a similar purpose in determining the viabilityof a new venture or business concept. With such simpler and lower cost methods, new ventures could beevaluated in subsequent stages of the process with methods that are morecomplex only if they successfully pass through the previous stage.Wasted effort would be minimal as each subsequent phase builds on theprevious one. Thus, a full-blown business plan would only be developedor considered once concept viability is reasonably established. As can be seen from the table, as one moves from left to right onthe assessment continuum, we are not only committing more time andresources to the evaluation process but also becoming more comfortablewith the project uncertainties leading up to a possible launch. It maybe best characterized as moving from a rough sketch to a fullyfleshed-out photograph of what should ultimately happen when the projectis fully executed. The discussions here open up several opportunities for not onlyteaching an entrepreneurship course, but also the integration ofentrepreneurship-related discussions across business school anduniversity curriculum. IMPLICATIONS FOR ENTREPRENEURSHIP EDUCATION Our discussions to this point have focused on defining the fourgeneral ways for assessing business viability, including the traditionalbusiness plan. We then compared each method using the six dimensionsdeveloped for our discussions. By applying more precision in our use ofterminology, we not only more accurately represent the array of optionsavailable for business viability assessment, but also are able tocommunicate to our students more clearly our intentions and expectationsas to the result being sought. This clarity is important for educators and not only for thoseteaching entrepreneurship or small business courses. As can be seen fromTable 1, the opportunity exists to incorporate quite readily businessconcept viability learning activities into other courses. For example,the breakeven analysis (Stage 1) can be incorporated into anintroductory accounting, finance or marketing course. More advanceddecision science, marketing, and strategy courses could includebreakeven, going concern and basic feasibility study activities (Stages1-3, respectively). An additional benefit of this 'unpacking'of the new venture assessment process is that it allows a businessschool to more readily integrate these basic concepts throughout itscurriculum. The continuum also suggests another important opportunity foreducators: there is more than one way to assess new venture viabilityand that each has its usefulness. As argued early on in this paper, thebusiness-plan-only approach taken by most textbooks and courseinstructors misleads students into thinking there is only one way toresponsibly assess business ideas. We suggest that this is not onlyincorrect, but that a business plan may be inappropriate, depending onthe stage of assessment. The tool used should reflect the purpose of theassessment. In addition to the more conceptual arguments made to this point asto the importance of the continuum presented, there are more practicalreasons for rethinking our approaches to teaching introductory coursesin entrepreneurship. While it appears that most academic programs thatoffer an introductory entrepreneurship course include a business plan asa central output of the course, the authors argue that a feasibilitystudy, supported with a break even and/or going concern analysis is moreappropriate for this level of course. The reasons for this view areseveral: This course is typically the first course where students must integrate previous functional knowledge into a cohesive plan or discussion. This may require the instructor to review previously introduced content and how this content must come together for an assessment to be credible. Functional integration is central to this exercise and does not require a full business plan to accomplish this. The timeframes of a typical semester tend to be short. Therefore, the analyses tend to be less rigorous and more descriptive, consistent with an early-stage assessment. The assessment exercise seems best focused on the business concept and its market viability, areas a feasibility study would typically stress. As an introduction, a feasibility study confronts students with the logical sequencing of new project assessment: preliminary first, more in-depth later, should the earlier results be supportive. This is consistent with not only the continuum presented earlier, but also is the general approach taken in practice. In many instances, undergraduates have not completed the basic finance course, bringing only fundamental accounting knowledge to the course. This limits the range of financial analysis possible. Since a course like this is often offered as early as the second year or early third, other content in operational areas such as human resource and operations management may not have not been introduced. Students in this course typically have had little or no experience in assessing concept or project viability. Some of this can be intuitive, but to the extent an evaluation that is more definitive is expected, a feasibility study better engages more students who are able to meet such expectations. CONCLUSIONS This study makes two contributions to the entrepreneurshipliterature. First, it makes the case that new venture viability shouldbe seen as a multi-phase process involving increasingly more complexmethods that should result in more sophisticated information from whichto evaluate the venture. Second, among the various methods discussed inthe paper, the feasibility study was viewed as the more appropriateteaching tool for the typical introductory entrepreneurship or smallbusiness course. It was argued that the feasibility study required lesstime and student sophistication to conduct yet preserved the majortenets of the learning experience expected in such a course. Six dimensions for comparison were proposed and four methods werecompared using these dimensions. Each method was discussed in light ofits role in the assessment process. A breakeven and/or going concernanalysis and then a feasibility study seem most appropriate for atypical semester-based classroom experience. Breakeven analysis and going concern assessments could also be morereadily introduced into other courses as they are markedly less complexthan either the feasibility study or business plan and could serve aspart of a longitudinal learning experience for students. One couldeasily imagine a feasibility study serving as the basis for a marketingor strategic management capstone course, for example, while a breakevenor going concern analysis could be introduced in an introduction tobusiness course. Applications to other fields could be made as well.While the same can be said for the more complex business plan approach,the feasibility study is significantly less costly and has the otheradvantages noted earlier. Finally, using a broader range of assessment methods clearlydemonstrates to students the existence and value of alternative toolsfor determining business or idea viability. Just as "rules ofthumb" are employed in many situations that require a quick reply,so too other methods of viability assessment need be presented tostudents, especially for evaluating business proposals. The menu ofmethods presented here offers such advantages and makes availablealternatives to the traditional business plan analysis with itsattendant detractions. In sum, by using the assessment continuum, Faculty teaching business courses could legitimately choose, depending on the scope of their course, to limit the business analysis to Stages 2 or 3 viability assessments and still accomplish the required student learning. Students would benefit by seeing a completed project in a more reasonable time frame with less economic burden. The completed non-business plan assessments depicted as Stages 1-3 in Table 1 could serve as the foundation for the development of an education-extending experience for students who might take additional courses that would further develop their original concepts into a business plan. Assessing new venture viability is central to launching conceptsthat succeed. Calling for a business plan for every such assessment islikened to using a hammer for every kind of maintenance problem aroundthe house. It just isn't necessary and sometimes downrightinappropriate. REFERENCES Barringer, B.R. & Ireland, R.D. (2008). Entrepreneurship:Successfully Launching New Ventures (2nd ed.). Pearson/Prentice-Hall:Upper Saddle River, NY Bhide, A. (2000). The Origin and Evolution of New Businesses.Oxford University Press: New York, NY. Delmar, F. & Shane, S. (2003). Does business planningfacilitate the development of new ventures? Strategic ManagementJournal, 24, 1165-1185. Eschenbach, T. (1992). Quick sensitivity analysis for smallbusiness projects and feasibility studies. Transactions of the AmericanAssociation of Cost Engineers. Vol. 2, pg. L6.1, 8 pgs. Gruber, M. (2007). Uncovering the value of planning in new venturecreation: A process and contingency perspective. Journal of BusinessVenturing, 22, 782-807. Hofstrand, D. & Holz-Clause, M. (2006). Feasibility studyoutline. AG Marketing Resource Center, Retrieved on October 1, 2007 fromwww.agmrc.org/agmrc/business/startingbusiness/feasibilitystudyoutline.htm Justis, R. & Kreigsmann, B. (1979). The feasibility study as atool for venture analysis. Journal of Small Business (pre-1986), 17,000001; ABI/INFORM Global, pg. 35. Katz, J.A. (2007). Education and training in entrepreneurship. InJ.R. Baum, M. Frese, R. Baron (Eds.), The psychology of entrepreneurship(2007) (pp. 209-235). Lawrence Erlbaum Associates, Inc.: Mahwah, NJ. Katz, J.A. & Green, R.P. (2007). Entrepreneurial SmallBusiness, McGraw-Hill/Irwin: New York, NY Moutray, C. (August 2007). Frequently Asked Questions. SmallBusiness Administration, Office of Advocacy. Retrieved on March 2, 2008from http://www.sba.gov/advo/stats/sbfaq.pdf. Sahlman, W. (1997). How to write a great business plan. HarvardBusiness Review, Jul-Aug, 98-108. Small Business Notes (2008). Business Plan Competition Directory.Retrieved on March 1, 2008 fromhttp://www.smallbusinessnotes.com/planning/competitions.html. Timmons, J. & Spinelli, S. (2007). New Venture Creation:Entrepreneurship for the 21st Century (7th ed.), McGrawHill/Irwin:Newark, NJ Kermit W. Kuehn, University of Arkansas-Fort Smith Doug Grider, University of Arkansas-Fort Smith Robert Sell, University of Arkansas-Fort SmithTable 1: Assessment Dimensions Relative to Assessment Continuum ASSESSMENT CONTINUUMSTAGES 1 2TYPE Breakeven Analysis Going ConcernPURPOSE Screen and rank Estimate 'steady alternatives state' pro forma Testing basic Revising/extendingFOCUS assumptions of basic assumptions market potential for into steady state pro profits formaDEPTH of Published industry Published industryANALYSIS data or reasonable data or reasonable extrapolations extrapolationsLENGTH 1 page summary 1-2 page summary. Single-year pro formaSPEED 1 day or less 1-3 days or lessCOST Few hundred dollars Estimated under a $1,500 ASSESSMENT CONTINUUMSTAGES 3 4TYPE Feasibility Study Business PlanPURPOSE Estimate ramp up to Launch detail and steady state funding plan Specify market Launch and early stageFOCUS potential, estimate operating plan ramp up schedule and requirementsDEPTH of Industry data, with Detailed with greaterANALYSIS tests of key reliance on localizing assumptions, and assumptions and data. localizing certain dataLENGTH 10 pages or less with 25 + pages with executive summary, executive summary, solid narrative on extensive narrative on marketing, marketing, operating operations and and financials, 5 year financial areas, 3 pro formas and detail year pro formasSPEED Typically under 30 Often > a month daysCOST Estimated $1,500 to Could readily exceed $5,000 $10,000Note: Cost estimates given are approximate for the type of assessment